In the economy, inflation is understood as a steady increase in prices for goods and services over a certain period of time. This leads to a drop in the general standard of living of citizens. Among the reasons for price increases are usually called a rise in demand at a constant level of supply, an increase in production costs and an expansion of the money supply in circulation. However, there are exceptions. And one of them is inflation in the United States, which remains quite low in recent years, despite the active monetary policy of the state.
Measurement and Performance
Inflation leads to the fact that money is losing its purchasing power. Every month, people can afford less and less, provided that their salary remains unchanged.
Inflation in the USA, as in other countries of the world, is measured using special indices. Its level is actually equal to the percentage of their change. The Fed seeks to maintain two percent inflation in the United States. It is believed that this level contributes to the effective expansion of the economy, as consumers have an incentive to make purchases.
US inflation is determined using two indicators. The consumer price index is calculated by the Bureau of Labor Statistics on a monthly basis. His basket of products includes all the necessary goods and services, from food to education. The second indicator is the index of production prices. It includes goods such as fuel, farm products (such as meat or grain), chemicals, metals.
The United States distinguishes between the concepts of general and core inflation. The first differs from the second in the percentage increase in food and energy prices .
Inflation has not only positive, but also negative aspects. Among them are reducing the burden of the public and private sectors, keeping the nominal interest rate at more than zero and reducing unemployment.
Current situation
In October 2016, inflation in the United States amounted to 1.6%. This is 0.1% more than in September. However, this level is the highest since October 2014. The main reason was the rise in housing prices and electricity. Food prices have been falling for two months now. From 1914 to 2016, the average inflation rate in the United States was 3.29%. The highest rate was recorded in June 1920. Then inflation amounted to 23.7%.
Causes
- The increase in demand at a constant level of supply. This means that consumers want to buy more than manufacturers can provide. This situation may be associated with such factors: expansive fiscal policy (tax cuts or increased government spending to stimulate the economy), currency devaluation, active monetary policy (increase in money supply).
- Increase in production costs. The main factor in this type of inflation is the growth of salaries. The role of costs for other means of production besides oil has been gradually decreasing since the 1980s.
- Also, inflation in the United States is due to consumer expectations. If people expect to increase prices, then the demand for goods and services will increase. Therefore, the Fed sets inflation at 2% per year. This reduces the role of consumer expectations as a factor.
Why is US inflation so low?
It is logical that the increase in the amount of money in circulation leads to an increase in the price level. However, if you look at the US economy, this rule is not always observed. There is a link between reserve building and increased demand in the United States, but since 2010, the Fed has been able to directly influence long-term interest rates. Commercial banks have the right to create additional reserves in the Fed, not only for the purpose of lending to consumers, but also to obtain a small but steady interest.