The Effects of Inflation



The Effects of Inflation

Summary

The article “Inflation Slowed in August, Reflecting a Weak Economy”, Written by Christine Hauser, highlights the decrease in the inflation rate in the U.S' economy in the month of August 2011. There is a decrease in the CPI, but it is only due to the decrease in energy prices. It has also been observed that the Fed is not taking any relevant measure to control the situation of instability in the economy. One of the important suggestions given to Fed was to lower the long term interest rates on bonds.

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Critical Analysis

The author states in the beginning that the rise in the food prices is tempered by decreasing the prices of gasoline and automobiles. The word tempered used here is not clearly mentioning the positive or negative impact on the food prices. The author also suggests that one month's data of the index is quite enough for analysts to base their decisions; the rationale behind this statement looks unrealistic as to on what ground he is basing his conclusion. The data of CPI shows a slight increase in food prices of 0.1 % and according to the government's statistics the overall decrease in the CPI inflation was due to the relaxation in gasoline and automobiles prices (www.bls.gov, 2011). On the other hand, author also states that, despite the decrease in inflation the situation in the job market and manufacturing sector is quite unstable. The author is not clearly mentioning the inflation he is referring to; cost push inflation or demand pull inflation (Hauser, 2011).

The author further adds that the investors seemed to be more interested about the impact of European debt crisis on the US economy and the decision of Fed policy makers. He is not clear about the investors he is referring to; does he mean local investors, foreign investors or both. Mr. Rankin of PNC Bank gave the suggestion to Fed to control the inflation, by decreasing the long term interest rates. He has not mentioned the probable outcome if the suggestion is implemented by the Fed.

Mr. Blitz the senior economist for ITG Investment Research suggested that rents are a factor which is increasing the index, but it could positively impact the economy as it can encourage construction in multifamily homes and rental housing. It is a good example to help the economy. One more reason for the increase in CPI is the weakened dollar which means imported goods are more expensive for the locals. On the other hand, it might give an opening to the domestic producers to compete with the imported goods and improve their quality of products. The negative side has not been mentioned i.e. the weakening of the dollar will lead to imported inflation, which again will be disturbing for the economy (Hauser, 2011).

The complete article gives a true picture of the inflation problem in the US economy. I believe the sentence “those pockets of weakness” should be discussed in more ...