Inflation or Recession in the USA - Research Paper Example

 Inflation or Recession in the USA Introduction Inflation is a broad and widely discussed topic of economics that affects each and every individual’s daily life. Primarily, there is no one definition of inflation. Due to the vastness of concepts that have been attached to this phenomenon of inflation, there are a number of types of inflation such as price inflation and monetary inflation. The general increase in the price level in an economy is called price inflation and this is the type which will be the focus of the research paper The start of 2009 can easily be considered the year recession has engulfed the world. it sprouted from the United States of America, where the sub-prime mortgage crisis literally collapsed the financial market system. The recession and inflation are two concepts of economics that are avoided to the maximum for a stable and fulfilling economy. However, inflationary pressure exists when the economy is doing well; it puts pressure on the general people. They need more money to buy the same quantity of product. Therefore, on the consumer side, inflation is not welcomed at all. In times of recession, the inflationary pressure is bound to go down, however, the world economy is seeing turbulent times and the inflationary pressure is not decreasing with the same extent as it should. This has raised many questions regarding the factors due to which this phenomenon is occurring. The basic idea of this research paper is the discussion regarding the recession that has engulfed the world economy and how inflation is working to provide support to the economy. All about inflation One of the major ways through which inflation is through controlling the money supply that exists in that particular economy. The control of the money supply in an economy resides with the central bank of that state. However, there are other factors that affect the inflation which are also beyond the control of economies. Generally in a stable economy, a slow increase is considered desirable and acceptable. A slow and steady growth rate in inflation might indicate the movement of the economy towards prosperity and boom. A rapid increase or decrease in inflation might be an indicator of an underlying problem of an economy. (William, 1980) The tools with which the state banks or controlling authorities regulate the inflation are interest rates, money market operations or through setting appropriate reserve requirements. All these three tools are used to manipulate the rate of inflation that is existent in an economy. There are many types of inflation existing in an economy; types are based on the reasons due to which inflation occurs. Cost push inflation would be derived from the increase in cost prices that must have had an increase in the prices of commodities. Demand pull inflation, on the other hand, is due to the increase in demand of a particular commodity. As demand increases, people are willing to pay more for the same quantity of goods; hence the forces of economy move the prices upwards. Stagflation and hyperinflation are two aspects of inflation too. (Parkin, 1990) Inflation of recession Inflation can be the harbinger of adverse effects on an economy. These effects can either be the hoarding out phenomena that might exist in the minds of the consumers if they think the inflationary pressure on prices will increase. Also, investment and related activity might cease to increase, under the same anticipation. Also, it is said the inflation offsets the business cycle in a negative way that is harmful for the organization. In the recent recession that has hit the world, the economy has slowed down the biggest ever consumer spending boom that the world had ever experienced. The coupling of recession with high prices especially in the food and related commodity sector is greatly going to hurt the normal spender. Already, the increase in interest rates has made lending more expensive; people do not to loan out money. In recession, money is less as people are getting laid off; if coupled with inflation, this would mean the prices of common commodities would increase. This combination does not seem to be the perfect scenario. (Richard, 1958) When compared both the phenomena, recession is considered a much worse case then inflation. Inflation, in a slow yet controlled manner, is very good for economies as it helps to stimulate growth and is an indicator of prosperity. It is definitely better than stagflation that occurs when inflation and economic stagnation occurs at the same time; the irony of the matter is that both are unchecked during their initial stages to bring harm to the economy in later stages. The sharp increase in food and eatable prices from the start of last year and the surge has continued this year has also increased concern for consumers all around the world. This imported inflation is seen all over the world and it is becoming more difficult for a common man to survive in these turbulent times. Coupled with the subprime crisis, has brought about a situation where it has become a loss of the world economy that needs to be recovered from as soon as possible. The current situation is highly identical to the 1970s price shocks and the commodity boom that followed and leads to stagflation. However, there are a number of ways through which the situation can be controlled in an efficient and effective manner. When the last time this situation occurred, it improved due to positive feedback from the supply side economics, however, this time it is doubtful that something of this sort might happen that would save the economy. The economists who believe in the business cycle theory consider the downfalls as part of the business cycle and rate inflation as the key driver to these changes. (Ross, 2009) There is another circle of economists that believe that in times of recession, interest rates should be slashed so that inflation increases. This would actually make the purchasing power parity lower than that of before, however it is considerably better than the other situation that might be encountered. If recession was to take and the government doesn’t slash interest rates, a factory worker might be laid off for some months as loans for the firms would become more expensive; the payment would be made on the employee’s future. In sometimes, there would be more people fighting for the same source of bread. This is a much worse case than the one in which inflation rises; the lifestyles would change in inflationary periods, but during recession, mayhem occurs. (Taylor, 2009) Conclusion The conclusion that has been drawn regarding which one of the two options should be emphasized on to improve when considering the dire state of economies around the world. Studies have shown that changes in consumer demand and living patterns are expected in times of inflation but layoff during times of recession would create bigger problems for the world economies and they might not be able to survive the turbulent times. Therefore, the interest rates should be cut down and a small steady rate should be used, in order to help create the stimulus in world economies. This would lead to the positive consumer demand that has been lacking since the time for recession. Another suggestion that might be workable in this situation is tighter controls of the regulatory bodies over these financial institutions so that such mayhem is avoided. The increase cost push inflation regarding food prices is also hurting the recessionary economy big time today. Therefore, measures need to be taken to provide standardization and support to agricultural sectors so that prices might fall or the purchasing power parity of the consumers increase. Works Cited A Book Mooney R. Inflation and Recession. Doubleday. M, Parkin. Economics. Addison-Wesley Samuelson, W. Economics. McGrawHill A Web Page Taylor, R. “Inflation Vs Recession” Ezinearticles. Date Accessed: 20th March 2009. http://ezinearticles.com/?Inflation-Vs-Recession&id=1491047 Read More