Essay Sample on Current Economic Topic: Inflation

In economics, inflation refers to the continual rise in the general level of prices for services and goods within an economy over a period. When prices of goods and services increase, every currency unit buys fewer services and goods hence resulting in a consequential decline in purchasing power for every unit of money. Suliman and McCann (2016) argued that inflation refers to a measure at which an average level of services and goods increases over a given period of time. Any increase in price leads to a reduction in the value of every individual unit of currency since it buys fewer services and goods. The reduction in the purchasing power of individuals leads to a significant impact on the living costs for common citizens, which consequentially leads to a decline in economic growth (Suliman & McCann, 2016). Most economists are in a common understanding that sustained inflation happens when the supply growth of a nation's money surpasses its economic growth. This paper focuses on the causes of inflation as well as its consequences on the nation's economy.

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Causes of Inflation

Cost of Production

Cost-push inflation happens when prices rise as a result of increases in the cost of production, like wages and raw materials. Seelig (2018) argued that when cost-push inflation occurs, the demand for commodities remains unchanged, while a decline in the supply of a good is registered as a result of increased production costs. The additional production costs are then transferred to the consumer of the goods in the form of exorbitant prices for the final products (Seelig, 2018). Among the indicators of probable cost-push inflation are the increasing prices of goods like oil as it is the main input of production. Furthermore, an instance of cost-push inflation may occur, for instance, when copper prices increase; all other companies that use it as the main production input may end up raising the prices of their final products. In this scenario, the cost of the raw material, which in this case is copper, ends up pushing the prices of the final products. The resultant effect is the increased price of commodities without a proportional increase in the demand for the same goods; this constitutes cost-push inflation (Seelig, 2018). The resulting additional cost of production is then transferred to the final consumer hence making then have a lower purchasing power. Another element of cost-push inflation is wages (Seelig, 2018). In a scenario where there are few qualified personnel in a given production field, a company may end up paying high wages to attract qualified candidates hence resulting in an increase in the company's cost of production, thereby having an end result of increasing the final prices of service and goods. Seelig (2018) argued that a rise in prices of goods and services of a company as a result of increased wages for employees might also trigger cost-push inflation. Furthermore, calamities such as natural disasters, for instance, destruction of crops like cotton by the hurricane, may also lead to a rise in prices across the whole economy as cotton is being used as a raw material in manufacturing many products.

Demand for Goods and Services

Strong consumer demands for given services and goods may lead to demand push inflation. Prices normally increase in cases where there is stiff demand for goods and services across the economy; the consequence is demand-pull inflation (Suliman & McCann, 2016). When cases of unemployment are minimal, then consumer confidence rises, making wages also to hike hence resulting in more spending. Martin (2017) argued that an expansion in the economy has a direct effect on the level of spending by consumers who may have a consequence of increased demand for services and goods. When there is an increased demand for a given good and service, the supply capability decreases hence resulting in fewer goods in the market. When there are minimal items in the market, the consumer will be more ready and willing to pay more in order to acquire the item, as stated in the economic principles of demand and supply. The effect is increased prices of goods and services as a result of demand-pull inflation.

Moreover, the central bank's expansionary monetary policy may minimize the rates of interest. Just like the Federal Reserve, the central bank may reduce the lending interest by banks hence making them lend more money to consumers and businesses (Suliman & McCann, 2016). The lending of money increases the circulation of money in the economy hence leading to more spending as well as increased demand for services and good. This leads to an increase in the prices of services and goods due to demand-pull inflation.

Consequences of Inflation

Borrowing Costs

Increased inflation may result in higher costs of borrowing for people and businesses in need of mortgages and loans as the financial market guards itself against increasing prices and raises the borrowing costs on long-term and short term debts (Suliman & McCann, 2016). The increased borrowing costs discourage investment by business people hence leading to retardation in economic growth.

Competitiveness of a Business

A nation that has experienced higher inflation rates for a long period of time than others tends to have its export at a less price competitive in the global markets. This may put businesses to be at a vulnerable state hence depriving them of the competitive advantage, which may consequentially make them collapse (Suliman & McCann, 2016). The decreased competitiveness of a business may eventually be evident via decreased orders for export, fewer jobs, lower profits, and a worsening debt balance of a country (Suliman & McCann, 2016). A decline in export may produce adverse accelerator and multiplier effects on employment as well as national income, a situation that may place a country into a pathetic economic condition.

Conclusion

The increased circulation of money in the economy increases the purchasing power of individuals hence leading to increased demand for goods and services. When the demand for goods and services increases, their supply may decline. This makes it possible for people to be willing to pay more in order to get goods and services. The increased prices of goods and services lower the value of money, a consequence of inflation. An increase in the cost of production, as well as demand for goods and services, are some of the causes of inflation. Inflation is very detrimental to economic growth as it increases the cost of borrowing as well as lowers the competitiveness of a business.

References

Martin, L. (2017). 'Stagflation': A condition created by accelerated demand-pull inflation (Comment). American Journal of Economics and Sociology, 44(4), 497-502. doi: 10.1111/j.1536-7150.1985.tb02386.x

Seelig, S. (2018). Rising interest rates and cost-push inflation. The Journal of Finance, 29(4), 1049-1061. doi: 10.1111/j.1540-6261.1974.tb03085.x

Suliman, M., & McCann, K. (2016). Inflation: Some empirical evidence. The American Economist, 35(2), 49-59. doi: 10.1177/056943459103500207