Inflation in the U.S.

Inflation has existed in the United States for every decade since the 1910's except the 1930's. During the 1970's after the U.S. completely removed the gold standard from backing currency, inflation rose rapidly. What this means is the price and cost of products and services generally rises in an ongoing manner causing downward pressure on the purchasing power of the dollar over time. When someone says they were able to buy something for a fraction of the cost 40 years ago they are indirectly indicating inflationary forces exist over time.

Inflation can be good and bad in the sense the presence of inflation may be an indicator of a prosperous economy seeking to gain greater profits within various sectors, or in the case of a less favorable inflation, demand for products exceed supply. Since inflation is a variable within the nexus of economic relationships, it is perhaps best not to perceive it as the only indicator of an economy's success or failure, but instead as a metric that points to economic behavior in relation to other economic circumstances, the total of which may be beneficial or not. This article will discuss the meaning of inflation in terms of how it is measured, historical inflation trends within the United States, causes and remedies of inflation.

Inflation metrics

Inflation metrics measure inflation within specific areas of the economy and consequently can be quite deceptive if not assessed in terms of other inflation metrics and the economy at large. For example the consumer price index (CPI) is measured in two ways, one way includes all items in the cost of living while the excludes energy and food costs which comprise a great deal of consumer spending. The differences between the two are quite significant especially in light of the surge in energy prices experienced during periods where energy costs have risen such as the 1970's and 2000's. A few of the other economic inflation indexes are provided below.

• Consumer Price Index (CPI) and Implicit Price Deflator (IPD): Measures consumer product costs

• Producer Price Index (PPI): Measures industrial production costs

• Employment Cost Indicator (ECI): A metric that follows the cost of labor

• Personal Consumption Expenditures Price Index (PCEPI): Another measure of consumer costs

• International Price Program (IPP): Used to assess prices of international goods

U.S. inflation statistics and facts

• U.S. consumer price inflation from 1913-2006 has averaged 3.43% per year.(5)

• The U.S. Producer Price Index experienced very large rises between 1950-2000.(7)

• 1975-1999, professional and technical salaries increased an average of 5.4%(6) 

• Service occupations salaries rose an average of 5%/year between 1975-1999. (6)

• Average PCEPI i.e. Personal consumption Expenditures Price Index between1983-2000 was 3.8% for services and 1.1% for goods. (4)

Causes of inflation

Inflation is a fairly common phenomenon throughout the World and is generally not favored by consumers but is sometimes favorable to businesses that are able to take advantage of inflationary movements in revenue generation. In general however inflation spells increasing costs and lower purchasing power per dollar. Several factors contribute to the occurrence of inflation, specifically those listed below.

• Demand for goods and services exceeds supply pushing prices up

• Production costs rise causing prices of goods to also rise

• Excess profiteering caused by semi-exclusive i.e. oligopolistic corporate pricing power

• Passing on industry specific costs i.e. high demand, and higher production costs 

• Money supply rises increasing wealth thereby causing prices to rise

Remedies for inflation

Inflation above a certain percentage is considered hazardous to an economy because it can negatively impact economic growth and prosperity where as lower levels of inflation around the 2% range tend to be manageable and exist side by side with economic growth. Consequently, the United States Federal Reserve keeps a close watch on inflationary data and attempts to periodically adjust money supply so as to avoid inflation and assist economic growth. By tightening money supply with higher borrowing cost, inflation is slowed but so to can economic growth be slowed, and the reverse can be the case when borrowing costs are lowered.

On the consumer end, inflation protection  helps ameliorate the rising cost of goods and services and preserves the value of investment capital. Inflation can also be remedied and dealt with in various different ways at the economic level. Some methods treat the problem of the inflation with countermeasures, whereas other measures such as the U.S. Federal Reserve monetary policy attempt to cure and/or limit the negative effects of inflation from the front end. A few remedies and methods that are used in dealing with inflation are provided as follows.

• Inflation adjusted incomes

• Inflation protected investments

• Fiscal and Monetary policy

• Business regulation

• International trade agreements

• Foreign Banking Alliances

In summary, inflation is a common and well known economic reality that has existed at various levels throughout most of the last century. Inflation is measured using broad based economic metrics that focus on main areas of cost and price pressure such as consumer spending and industrial production. Inflation is also tempered and regulated by the U.S. Federal Reserve, legislative fiscal policies, international trade and banking agreements, and business regulation. 

Consumers can also protect themselves form inflation by investing in inflation protected securities and asking for inflation adjusted pay raises. Understanding the effects of inflation, its causes and ways to deal with it can assist businesses, economists and consumers in adjusting for and appropriately dealing with fiscal and monetary outcomes typically associated with it.

Sources:

1. http://www.clevelandfed.org/research/inflation/us-inflation/cpi.cfm
2. http://www.mrsc.org/focuspub/ipd.aspx
3. http://www.econ.umn.edu/~smith097/articles/A%207.%20.pdf
4. http://www.allbusiness.com/marketing/market-research/917714-1.html
5. http://www.inflationdata.com/Inflation/Inflation_Rate/DecadeInflation.asp
6. http://www.bls.gov/dolfaq/bls_ques6.htm
7. http://twocents.blogs.com/weblog/long_wave/index.html
8. http://www.labormarketinfo.edd.ca.gov/article.asp?ARTICLEID=625&PAGEID=3&SUBID=112
9. http://www.bls.gov/ncs/ect/sp/ecbl0014.pdf