US economy

US economy

In economics, inflation refers to a situation when the general prices of goods and services in a particular economy rises over time. When the prices increases, the purchasing power of currency reduces significantly. A unit of currency buys less that it did before the occurrence of inflation. Generally, inflation has adverse effects on any country’s economy as it devalues money and reduces the living standards of people. However, economists have argued that ideally, some level of inflation is required to spur spending levels of people and minimize savings, which ultimately boosts economic growth. Many countries in the world have suffered inflation that has affected their economies negatively relative to other economies. This paper will critically analyze the inflation treads in the United States and how it is immensely adversely affecting its economic growth.

The Us economy is the largest and perhaps the most important in the globe regardless of the challenges it is facing due to the transforming world. Still being larger tan the China’s economy, the US economy forms over 20% of the total global output, it is among the states with the highest GDP in the world and has giant economic features characterized by the highly advanced and developed service sector. It is the second-largest manufacturer across the globe and leads in significant industries such as automobile, machinery, aerospace, telecommunication, and aerospace. Nevertheless, the US economy is still struggling to recover from economic turmoil that began in 2008, when it experienced a significant recession. The recession was caused by many factors such as reduced interest rates, increased risk-taking in the financial sector, increased mortgage lending, and high consumer indebtedness. The labor market is almost recovering, but the economy is still struggling to date to move forward. The struggle is caused by challenges such as wage stagnation, worsening infrastructure, increasing income gap, enhanced pension and related costs, and large budget deficits. All these factors have seen an increase in inflation in the United States.

A scrutinized GDP data on the US economy has shown that its growth and development were stable for the last quarter of last year, but the growth has significantly reduced at the beginning of this year. The specific indicators to these treads are attributed to significant consumer fundamentals. There is a reduced industrial production, which resulted in inventory drawdown. In the long run, this will cause inflation in the country. Meanwhile, the outbreak of the coronavirus has destabilized the financial markets and a resultant slide in the fuel prices in the consumer market.

Further, the epidemic has caused dragging in business activities and further disruption of the industrial sector, which was already unstable. Although it is an effect on a majority of global countries, it has caused trade tensions among nations. In the United States, fiscal policies have been fading over time, and reduced investments have affected economic growth. All these factors have decelerated the growth, but stable consumer dynamics and cutting of lending rates could bring light.

A recent study has shown that US consumer prices had seen an increase for four months up to February, which amounted to a reduced annual gain. The underlying inflation, coupled with the slowing economic growth, is expected to cause a further increase in the interest rates this year. Besides, the Consumer Price Index( CPI), a tool for measuring inflation, increased 1.5 percent in the last 12 months. The rise, which surpassed the economists’ forecast, was caused by an increase in costs of food, rents, and gasoline. The Fed has a 2% target of inflation, and to adhere to the monetary policies, it tracks a separate price index, the personal consumption expenditures (PCE). The index increased 1.9 % on an annual basis, which surpassed the target of 2% inflation by the US central bank.

Unemployment in the united states has generally been low. Unemployment usually falls during times of economic prosperity in a country and increases during recessions. Fiscal policies such as increasing government spending as well as monetary policies such as lowering interest rates can help reduce the unemployment rate in a country. The Phillips curve, as shown below, has indicated that inflation and unemployment are inversely related: the decrease in unemployment increases the rate of inflation.

It means that there are chances that inflation will continue to affect its economy if unemployment is anything to go by. FRED, an economic database maintained by the St. Louis Federal Reserve, has also revealed a similar relationship between inflation and unemployment, as shown by the chart below.

The United States must enforce economic strategies in the labor market to recover from the Great Recession and the first decade of the 21st century. Failure to this recovery, its economy will continue to suffer high inflation. A significant indicator for evaluation of the US labor market is the analysis of the share occupied by the working-age population with a job which is 25 to 54 years. It is straightforward that the economy is still trying to recover from the first recession that took place in early 2000. Currently, Fred records have shown that the share taken by the working-age population was about 76 percent. This value is 4 percent below its pre-recession level in late 2007.

Further, it means that about 3.8 million people within the working-age would hold a job if the employment rate levels before the great recession remained.  Ultimately, the economy is approximately five percent below the share of working-age people. Therefore, there is a lot to be done in the US labor market. The following is a chart from Fred that shows how Americans are in the prime of their lives, yet they are not working.

In conclusion, there are a lot of factors that are affecting the Us economy. Factors such as rampant inflation, the massive balance of payment deficits, and widespread economic recession have posed significant threats to the US’ future economy. The recent inflation has been contributed by an interplay of demand-pull and cost-push forces in the market. Such forces include excess demand, energy shortage, an increase in commodity prices, price adjustment, and wages that have been affecting the inflationary situation. The US government needs to uphold strategies to mitigate high inflation rates. Such plans include the formulation of joint policies on finance, trade and energy, formulation of effective domestic economic policies, production stimulation, and strengthening competition. Finally, it will remain essential to control inflation while still stimulating economic growth and development.