Inflation and Government Economic Policies - Essay Example

Inflation and Government Economic Policies Inflation is the persistent rise in the price level of commodities in an economy over along duration of time. Such an increase in the price level arises due to dwindling value of money that may be caused by disproportionate summative demand or supply-side influences. Inflation caused by market factors occurs where an increased demand for goods by consumers lead suppliers to increase the cost of goods. Supply-side factors, on the other hand, triggers rise in the price of commodities where the rise in price of critical raw materials makes producers increase the selling price to meet the rising production cost.

Economists tend to view moderate inflation favorably as it enables an economy to withstand a recession and empowers monetary policies to stabilize the economy. Additionally, inflation serves as a benchmark for a growing economy. Inflation may be regulated through monetary and fiscal policies by the monetary authorities.The Consumer Price Index is a measure of variations in the cost of a basket of commodities bought by households in a given period. Inflation can be quantified as the annual positive change in the Index.

As shown in Table 1, since 2000 the C.P.I. has maintained a steady rise, except for 2009 when it fell (U.S. Bureau of Labor Statistics., 2015). Such an increase in the Consumer Price Index has been due to increased buying by the consumer. The desire to have the latest electronic gadget has primarily contributed to the increased purchasing, resulting in a positive change in the C.P.I. Additionally, C.P.I has been affected by the amount of disposable income and the relative prices of competing commodities.

Table 1On the other hand, Producer Price Index (P.P.I) is an average measure of the change in the retailing prices paid to internal producers for their output. While the P.P.I has always been in constant flux, the change in the prices has always been a positive change. The increases in producer prices are due to the increasing cost of raw materials and sources of energy. Due to the constantly fluctuating prices of oil, which is a major raw material or source of energy, the P.P.I has always reflected the flux experienced in the global oil prices.

In 2009, PPI experienced a negative change due to falling prices of raw materials during the financial crisis as shown in Table 2 (U.S Bureau of Labor Statistics., 2015).Table 2Consumer Expenditure Survey (C.E) is a federal survey that tracks the purchasing behavior of American consumers through the Quarterly Interview Survey and the Diary Survey. Since 2000, the CE has constantly been on the rise due to increased disposable income amongst the consumers. However, as illustrated in Table 3 below, in 2009 the CE went down due to diminishing disposable incomes during the economic crisis (U.

S Bureau of Labor Statistics, 2015). Some consumers lost their jobs while others had salary cuts that combined to reduce the amount of income available to dispose.Table 3It is clear that both the Consumer Price Index and the Producer Price Index can be used to predict inflation rate of a country. The rate of inflation is directly proportional to the rate of change of C.P.I and the P.P.I. The Consumer Expenditure Survey shows that despite the increases in the price of goods, consumer incomes have managed to keep abreast with the rate of inflation.

Consequently, the CE has continued to rise reflecting the ability of wages to keep up with inflation. With the trend depicted by C.P.I and P.P.I, it seems that there will be a moderate rate of inflation. Recent federal bailouts seem to have steadied the economy, and it seems they may need to be discontinued. The economy has stabilized and the government may need to discontinue the bailouts.ReferencesU.S Bureau of Labor Statistics. (2015, April 13). Consumer Expenditure Survey: Bureau of Labor Statistics.

Retrieved from U.S. Bureau of Labor Statistics.: http://www.bls.gov/ces/#tablesU.S Bureau of Labor Statistics. (2015, April 13). Producer Price Indexes: Bureau of Labor Statistics. Retrieved from U.S Bureau of Labor Statistics Web site: http://www.bls.gov/ppi/#tablesU.S. Bureau of Labor Statistics. (2015, April 13). Consumer Price Index: Bureau of Labor Statistics. Retrieved from U.S. Bureau of Labor Statistics Web site.: http://www.bls.gov/ces/#tables