Inflation

Reference: Asian Development Bank. “Special Report Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End'” Manila, Philippines: Asian Development Bank, Apr. 2008. Print. Summary: The special report entitled “Food Price and Inflation in Developing Asia: Is Poverty Reduction Coming to an End'” was published by Asian Development Bank (ADB) which is committed to help its developing member countries reduce poverty substantially and improve the quality of people’s life. Though, many member countries made their own success, there are still nearly 1.7 billion people in poverty, live on $2 or less a day. Due to the sharp increase of the food price since the middle of 2007, a research team led by William E. James of the Economics and Research Department was preparing for this report to propose appropriate policy responses to the inflation of food price. The report is divided into 7 sections. The introduction part shows due to the raise of the income, growth of the population and the steadily rising of the agricultural productivity, food prices had been declining for decades. However, all these improvement lead to continuous growth in demand, and bring about a reversal of this long term trend. Since the inflation crisis take place in 2007 across the Asia and Pacific regions, the further rise in food price in 2008 reach the alarming level. The food price is such a worrisome matter because it’s huge harm to the poor. In the second section, while the researchers are explaining the reasons behind the recent surge in food prices, the report states the necessity to explain the underlying causes of high food prices through three ways: Structural and Cyclical Factors, Demand and Supply Factors, and Domestic and World Markets. In the following 3 section, the impacts due to the burst of the food crisis were shown by the researchers. The report clarifies some macroeconomic effects behind high and rising food prices in recent years through analyzing food price shocks and fiscal impacts on food and fertilizer subsidy from rising food prices. As well, the impact of rising food prices on households was mentioned. Then illustrate the medium-term supply response and poverty impacts in some regions including China and Indonesia. In the last two sections, the research shows the ADB’s long term policy across the region for food security and tabulates to introduce their Safety Net Programs and explains their policies on how to mitigate rising food prices. Relating: Not only in Asia and Pacific regions, discussions of food prices and related policies during the worldwide inflation crisis are becoming heated once again. With all kinds of information medium, like publication, television, broadcast or internet, we can acknowledge that, the growing food price crisis is no longer an issue in some specific regions. As the war, food is another item that could seriously threaten world peace. Owning to the crisis, food, as one of the most critical things to keep people alive, is becoming the most serious issue among people. I learnt some news from Times, a taxi driver in Cameroon, turn into a massive protest about food prices while he was strike over for fuel prices not long ago before 20 people around him was still life. In some places, the food price issue spins out of control; the protests for the high and the accelerating price have turn to violent affairs. Protesters in the West African nation of Burkina Faso burned government building and looting stores. I can also learn the reason of the continuous rising from my knowledge of economics. Since the international financial crisis burst in 2008, many banks collapsed; People have lost their faith in saving money in the banks. The crisis gave a tremendous impact for many enterprises as well. Due to the rupture of the capital chain, companies have to sell the goods in higher prices in order to keep the company survive during the crisis. The rising good prices are taking their toll on the family budget. When it comes to the farmers, or other food producer, they will spend more household budget on the necessity, so that they wish to sell their product, foods, in higher prices for better life. Reference: Levin, Andrew T., Natalucci, Fabio M., and Piger, Jemmy M. “The Macroeconomic Effects of Inflation Targeting.” Federal Reserve Bank of St. Louis Review, Jul./Aug. 2004: 51-80. Print. Summary: In the second chapter of the research, the authors begin their analysis of the macroeconomic effects of inflation targeting policy through study the behavior of inflation expectation both in the policy taken countries and non-policy taken countries to see whether a long term inflation expectations are anchored in IT policy taken countries. Then, an analysis to the dynamics of actual inflation was made by the authors, and a question has been made, whether inflation persistence shows a lower level in policy countries than non-policy taken countries. Through analyzing the macroeconomic volatility, both output and inflation volatility, in the fourth chapter. The paper shows that shocks to inflation in IT countries have been large relative to non-IT countries. The authors also indicate that economies which have not experienced low levels of inflation persistence would have higher inflation volatility. Finally in the fifth and sixth chapter, the research includes the characteristics as well as the effects of inflation targeting in emerging market economies. However the investigation of the early experience by the authors confirms that the adoption of IT policy has generally not been associated with an instantaneous adjustment of inflation expectation. Due to the global economic fluctuations, additional research and experience is required in implementing IT policy and ensuring the positive contribution to macroeconomic stability. Relating: The inflation targeting policy, as an estimating tool for central banks in different country, is quiet a helpful means for me to get familiar with the policy which analyze the inflation situation of the particular economic which intent to resolve the longstanding inflation. In order to solve the severe inflation situation, different fiscal and monetary policies have been made by the government. However not all fiscal and monetary policies works like the inflation target policy. Though, some economists argue that some policy will make things worse and destabilize the economy. Serve as guides to decision making, as well as providing a way to hold independent policymakers accountable, choosing whether to adopt the policy is critical to the government. According to the publication posted by Jim Saxtion from the United States Congress, which contrast inflation targeting policy with existing empirical evidence. There is little or no evidence that indicate the inflation targeting policy has a negative effect financial market, while adopt inflation targeting policy will make maintaining price stability easier. As emphasized by other policy adopted countries, the US government believes adopting inflation targeting will help future economic performance as well as solving the inflation issue. Reference: Bils, Mark, Klenow, Peter J., and Malin Benjamin A. “Reset Price Inflation and the Impact of Monetary Policy Shock s.” n.p., Feb. 2009. Print. Summary: The paper entitled “Reset Price Inflation and the Impact of Monetary Policy Shocks” was written by Bils, Klenow and Malin. It is a research on reset price inflation measuring and estimating of the real effects of monetary shock, which based on the massive calculation and restricted data from US Bureau of Labor Statistics. Firstly, the authors explain the definition of the reset price inflation as the rate of change of all desired prices, including the goods which have not change price currently. The authors using micro data to construct an empirical measure of the rest price inflation. Since the consumer prices change every seven of eight months in the US, data from Klenow and Krystov, and Nakamura and Steinsson in 2008, the following figures indicate the real effects of monetary shocks that it lasting roughly 4 times longer than nominal price stickiness. The paper shows the high contract multipliers models at the macro level display slow moving reset prices at the micro level. And the authors believe the strategic complementarities should contribute to dampen the volatility of reset price inflation as well as boost its persistence. Second, in the next section, an empirical measure of reset price inflation was included. This chapter describes the dataset and the empirical properties of reset price inflation. A serial of calculation have been done to measure and defining the reset price inflation were based on the data from the CPI Research Database. In addition, evidences on reset price inflation presented in the form of tables and figures. Then, section 3 lays out the two leading sticky price models, TDP and SDP models, to discover the behavior of reset price inflation using each model independently, meanwhile compares statistics from the simulated models to empirical counterparts. Due to the estimate that monetary policy shocks affect real variables for several years. Finally the authors come to the conclusion that strong strategic complementarities dampen the volatility of reset price inflation severely while the shocks do not sustained. Relating: Due to the rapid price changing during the inflation period, reset price inflation indicates that the changing rate for all the products, even it is not changing yet. High and unstable inflation can be costly. It weakens the economy’s stability. So finding ways that keep the price stable is critical to hold a lower level of inflation. That is why the price stability is so important. The price stability is a situation where inflation is low enough that no longer has effect on economic decision and policy making. However, I wondered, what happens after a shock to monetary policy' Temporary monetary policy shocks might explain the low persistence of reset price inflation, but the authors failed to generate as much volatility as seen in reset price inflation in the US from 1988-2008. Despite the failure in finding a model in illustrating the relationship between reset price inflation and the monetary policy shocks specifically, there is still strong evidence that the volatile price and the shock of the monetary policy will do harm to the local and global economy. So I say the research should keep on searching. Reference: Summary: To get a clear understanding of inflation situation and prospect, the speech “Monetary Policy, Demand and Inflation” was given by Stephen Kickell on the contacts of the Bank of England’s South East and East Anglia Agency. As the demand is relative to the potential supply and analyzes growth prospects relative to trend, the speaker feels worthy remarking on the relationship between inflation and prospects for demand in the economy. In the introduction section, the author put forward some aspects which are essential to understand inflation prospects today. Demand, he think, is the first to consider. And combining with growth prospects will generates new idea of underlying inflationary pressure. The second section is explaining the status of the UK Economy. Overall, through the figure, we can find out that there is a degree of spare capacity available in the UK economy at present. Following the economy analysis, to discover the demand-supply relationship, the author also presents the prospect for demand relative to potential supply. He is pursuing the question by considering how rapidly potential supply is expanding both in the world economy and the UK economy. The paper also shows how the consumption, investment, government consumption and imports-exports policy influence the demand. Then in the last two sections, the author explains the inflationary pressures in the pipeline that where does not seem to be any strong inflationary pressure occurred in the supply pipeline. The overall picture on inflation prospect is also mentioned to discover the future trend of the growth of demand. Relating: The speech gives me a closer look to the monetary policies which made by the government. The policies are made intent to ease the inflation situation. There are many ways that could cause the inflation; Demand and cost push are two main ones to look out for in the economy. Nickell’s speech leads me to further research in discovering more about the different types of inflation and policy that fight against the inflation. Apart from the “demand” in the economy, which have already mentioned in the speech, I would like to learn more about “Cost”. The demand pull inflation occurs when the level of demand grows too fast. Meanwhile more imports are brought into the country. Corporations cannot keep up with the growth in demand for their products, so that the prices increase sharply which is so called inflation. There are several means to reduce the level of demand and keep the inflation down effectively, such as increasing taxes, rising interest rates and reducing the level of government expenditure. The cost push inflation would take place when wages or prices rise too fast. The corporations have to raise their prices so that they can make up the increasing expenses. To avoid the cost push inflation, ensure the economic growth does not rise too fast is critical. Through analyze the different patterns of inflation will do a great help for me to distinguish one situation from another and which one caused the current inflation. Reference: Meltzer, Allan H. “Origins of the Great Inflation.” Federal Reserve Bank of St. Louis Review, Mar. /Apr. 2005: 145-175. Summary: The paper “Origins of the Great Inflation” is an economy history review of the Great Inflation, the climactic monetary event, took place from 1965 to 1984. For the purpose of giving advice for appropriate political decision making, political choice and analytic errors, the Meltzer, the author, analyze the reason why the Great Inflation occurred and why it last for so many years with a belief that inflation would continue. The Great Inflation was the central monetary event of the last part of the 20th century which struck the economy severely; fixed exchange rates of the Bretton woods system was destroyed, many industries were bankrupted, US capital stock was heavily taxed and arbitrarily redistributed income and wealth. The paper, as well, argues that to have a fully understood of this event, there is no way to analyze the Great Inflation and political dimension separately. The paper mainly divided into three parts. The first, “Previous Explanations” includes some theoretical errors and misinformation in analyzing the cause of the inflation, while indicate the important role of money growth in the formation of the Great Inflation. As well, put forward the remaining puzzles. Then in the next section, the author explain the reason why inflation started, analyzing through William McChesney Martin Jr., who was the chairman of the Board of Governors. Meltzer talks about Martin’s leadership and beliefs, and his role as an economist. To Martin’s beliefs, concluded in the last section, his absence of the relevant theory, errors, and institutional arrangements caused the start of the inflation. Relating: The article is a historical review about the central monetary even in the 20th century. It reminds me about learning the experiment from our ancestors. Through analyzing the cause and the aftermath about the Great Inflation, it is easier for us to understand our inflation situation at present and using the old experience helping us to conquer our current crisis. The study of the history also helps modern society to prevent the severe crisis from ever happen again. From the 1960 to 1979, the inflation rose from barely more than 1% to nearly 14%. It had a massive effect in every angle in our life. The cause of the Great Inflation was proved to be excessively loose monetary policy during the postwar period. Since the global economy is recovering from the 2008 financial crisis, inflation has occurred in many parts of the world; the price of food and other commodities rose rapidly, currency is devaluing. Many are worried that the exploding Federal debt and the expanded Federal Reserve Balance will lead to a large increase in big inflation. We found that monetary policy was significantly affected by political factors during this period. The author believes that appropriate policy correction could completely avoid another great inflation. It is a great chance for me to learn more about the policy through learning the economic history. Reference: Summary: The paper named “Where did the Productivity Growth Go, Inflation Dynamics and the Distribution of Income” was presented at the 81st meeting of the Brookings Panel on Economic Activity, which raises the doubt about the productivity growth is the source of growth in real income per capita. As the authors saying, the paper can be treated as a detective novel; it creates a direct link between macro productivity growth and the evolution of the income distribution at the micro level. The result including all the data and fact is that over the entire period 1966 to 2001 and 1997 to 2001. Apart from the brilliant micro data conclusions of this paper, the macro analysis, however, provides an important advance on illustrating the persistent inflation and wage dynamics. Instead of analyzing price and wage equation separately, the authors focus on wage adjustment and the change in the trend of productivity growth. 8 sections can be found in this “detective novel”. First, the introduction part, introduce the plan and the macro-micro construction of the paper. Part 2 provides a simple model of responses to a change in trend productivity growth. Part 3 analyzing the macro data and examining the behavior of labor’s share as well as the growth rates of productivity and different components of real and nominal income over the postwar period. To discover the direct impact of changes in the productivity growth trend, the authors using the reduced form inflation equation and the “mainstream” model which one of the authors, Gordon, has been working on. In the fifth section, the authors focus on the wage changes, trend productivity growth and trend unit labor cost feed back to the inflation rate. Meanwhile, demonstrate how inflation affects wage changes. Based on a new analysis, part 6 contains the analysis of changes in the income distribution through a micro angle. The seventh part talks about the extensions and implication; discusses the questions posed by the micro analysis. Relating: The speech indicates the productivity growth trend and the relationship between the productivity growth and inflation. The income distribution is another aspect that the speaker caring about. He narrates the basis of the economy phenomenon both through macro and micro way; the macro way generally in theory, while micro data enrich the whole speech. The speech is an indicator for my research in fining the trend of the productivity when comparing with the inflation situation. It indicates that the inflation has been low when the productivity growth has been high. Due to the slow response, adjust nominal income growth, to the changes in productivity growth by the Federal Reserve. That is the acceleration in trend productivity growth leads to the deceleration in inflation while the nominal income and wage growth did not change with the trend productivity. Despite the more capital income of the rich, the increasing skewness in wage and salary income is what drives the speaker’s result. According to the data in the speech, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy wide productivity growth. Reference: Hazlitt, Henry. _The Inflation Crisis, and How to Resolve It_. New Rochelle, NY: Arlington House, 1978. Print. Summary: The book “The Inflation Crisis, and How to Resolve It” written by Hazlitt, is considered as a wider and deeper analysis of the worldwide inflation instead of a revised edition of one of his earlier publication in 1960, entitled “What You Should Know About Inflation.” It is fairly a new book comparing with the previous one; about one-seventh of the material has been taken from the old volume while six-sevenths is new. The previous work is treated as a primer; however, the new volume is more ambitious, an advanced research on the inflation which spread and accelerated in recent years. The book is mainly divided in to 2 separated parts which supplement each other. The first part provides the overall view for the new readers while the second part is closer to the author’s examinations, with more detail and facts to make headway against the things that led to the persistent inflation. After a briefly introduction to what is inflation, some qualifications that cause appearance of the inflation as well as some popular fallacies in the inflation issue. Since the American inflation suddenly broke out in the past few years; however, he shows the fact that the inflation has been going on for about 40 years. People may think the inexpedience policy made by the government leads to the speeding up of the inflation. Therefore, Hazlitt set forth the fallacy of the Cost-Push policy in the following section to dispel the misunderstanding. As well, he criticizes the remedy in price and wage fixing which intent to reduce the inflation rate. He also mentioned the monetary management, the international exchange in gold, and the cure for the inflation. A serial of details and facts contribute to the explanation of the author’s investigation written in the second part of the book. He mainly demonstrates how spending, deficits, profit, interest rates and unemployment are related to the inflation. The author explains the reason why inflation is a worldwide phenomenon. He is searching for ideal money and other ways like strict or non-paper money control, gold and private money using to resolve the inflation condition. Relating: This book did a great help in expand my basic knowledge of the inflation. inflation affects the economy both in positive and negative side. A low, moderate inflation may reduce the severity of economic recession which is needed for the world’s economy recovery from the wound caused by the international financial crisis. If the money supply grows excessively, will leads to a high rate of inflation and hyperinflation which discourage investment and saving, as well as the increasing in commodities price. The book includes many mainstream topics about the inflation situation at present: the spending and deficits during the inflation economy, important lesson that we learned from the German, value of the money and what determines it, inflation verses profit and interest rate, as well as the doubt on the US policy. The instances in the book provide me a closer look to the inflation, yet make the data reliable. And is still a great material for further researching. Reference: Virts, John R., and Wilson, George W. “Inflation and Health Care Prices.” Health Affairs, 1984: 88-100. Print. Summary: Due to the issue of increasing in the cost of care, discussions of health policy are becoming heated in recent years. The article “Inflation and Health Care Prices” is a policy oriented discussion written by Virts and Wilson in 1984, which intent to set forth the relation between the inflation and care prices. This discussion is based on the result of the paper “Inflation and the Behavior of Sectoral Prices” published by Business Economics on May 1983. The authors come to a conclusion that all the increasing in medical care price including health care goods, services and the cost of treatment is cause by the general inflation, the labor intensity of related industries, the volatile wage rates during inflation and the pattern of labor productivity changes. To discover what have been the causes of rising health care prices, the first section in main body of the article shows the relation between price per unit, utilization per capita and the population size, and how these aspect contribute to the change in total dollar expenditure. Many businesses and industries have been asked about why prices have behaved during the period of 1965 to 1981. So in the second section, the authors bring out a hypothesis that all relative price changes in different rates of inflation. Through analyze the data during that specific period and the facts shown in the table. The authors confirm the truth of their hypothesis, the specific inflation contribute to the changes in total health care expenditure. The failure in a number of attempts on health care industry which is taken during the 1970s indicates that it is impossible to eliminate all specific inflation through price controls. The specific inflation in different scopes, such as hospital, physician or dentist, is mentioned in the following paragraph to illustrate the provirus indication. The authors talk about the public and business policy implication in the last section. They believe that changes in the prices of health care goods and services need to rely on the potential impact on the growth of health care expenditure which generated by the government, public and business programs. Since the increasing costs of medical care have become a major concern for those political, business leaders and health care providers. This article is provided as a useful data and analysis for those who have to make public and business policy decisions wisely. *Re*lation: Inflation crisis burst out since the international financial crisis spreads throughout the world. Due to the inflation, with rocketing price of all the commodities, the price of all medical care good and service are raising continuously which gives a big strike to all the people who need a health care. Price increase, including the health care price, is one of the biggest effects caused by the general inflation. An article published by Thomson Reuterson redorbit.com indicates that, the average cost of health care for American employers is rising faster than inflation. According to the report that employers with 5,000 to 50,000 employees are suffering a 10% rate increase in healthcare spending, and companies with more than 50,000 people will experience more. On the other hand, medical costs rose 4.7% for the inpatient and 8.7% for the outpatient while the payment for the medicine from pharmacy cost 4.3% more. Medical cost, considered as one of the closest aspect to citizen’s life, required solve immediately. The article is providing me a better understanding of which aspect is critical to the price change during the inflation and how the policy affects the commodities price. Reference: Summary: The paper entitled “Global Inflation” is one of the working paper series published by the European Central Bank. It is also available on the ECB website. To confirm the hypothesis, inflation is a global phenomenon, and figure out the common economic forces that drives inflation in the OECD (Organization of Economic Co-operation and Development) country since 1960, the authors proceed with their research in 4 sequential steps. They begin with the estimate of the measure of global inflation using the quarterly inflation series of 22 OECD countries. Then follow with the discussion of some possible determinants of the global inflation. Furthermore, the research paper focuses on the study of the joint dynamics of national and global inflation. Finally, the authors state their intentions to improve the inflation forecast and provide new insight on inflation persistence. In the introduction section, the authors bring out their idea that national macroeconomic is depends on international conditions. While following the first part, the section 2, Inflation as a global phenomenon, describe the reason why internationalization is becoming the trend of the inflation, through estimating global inflation and analyze descriptive statistics. Therefore, they estimate that in the short run, the price of commodities, raw materials and energy which traded worldwide will have a significant change. In section 3, the authors are intent to figure out “what is driving global inflation.” Therefore, methodology is used to select the best predictors for global inflation then generate the results through analyzing the prediction data and the illustrations. The next section, the Dynamics of National and Global Inflation, authors demonstrate that the global inflation impact on national inflation rates. The research describes the global inflation as an attractor of national inflation rates. It is not only an important aspect for practical purposes but also a great guide which make the way for people to have a better understanding of the inflation process. Meanwhile, the report also provides a new benchmark for forecasting inflation and makes a new perspective on the persistence of inflation. Relating: The authors state the importance of global inflation for local economy, and the necessity to keep inflation records, even if some countries were clearly less affected by global inflation than others. Several directions that the authors give to the readers in the end of the report, simulates my desire in doing further research in explaining how inflation development. The report is a predominant director for me to discover the trend of the internationalization of the inflation. American economist and Noble laureate, Milton Friedman is one of the witness to the globalization of the inflation, a serious crisis, which is an increasingly serious issue at present. The globalization influence different nations in different manners. High income nations have progressed from generating advantages from the lower costs as importers of cheap commodities. Due to the increasing profits which are made during the internationalization competition, the market is left with surplus money which will finally cause the inflation. Reference: Summary: The report, published in Mar. 2001, named “Preferences over Inflation and Unemployment: Evidence from Surveys of Happiness” was based on the survey evidence on a quarter of a million people living in 12 European countries and United States. Di Tella, MacCulloch and Oswald tracked the source from Euro-Barometer Survey Series and the creation of Ronald Inglehart at the University of Michigan which records people’s happiness and life satisfaction for decades. The authors thought economists often focus on the costs of inflation instead of giving their attention on people’s subjective thoughts. They propose a new approach to examine how those reports as levels of unemployment and inflation through this paper. Their aim is to demonstrate the two variables, inflation and unemployment, occupy a significant position in people’s life. Meanwhile, calculate the costs of inflation in terms of unemployment. Two separate parts were divided in the main body of the report paper. Section one specified the main data source of the survey and empirical strategy, their main estimation strategy. 264,710 people across 12 European countries had been interviewed during the period 1975 to 1991 and 26,668 data from the United States General Social Survey during 1972 to 1994 as well. The survey was not explained by individual personal characteristics; however, the estimation strategy was based on a regression adjusted measure in a particular year and country. Tables of nations’ analysis were been used to illustrate the strong relationship between happiness and inflation-unemployment in the second part. The authors also emphasized that the questions were not asking about whether the respondents dislike inflation and unemployment; however, it should generates people’s positive altitude about how happy they are with life. Apparently, through the research, the authors came up with the conclusions that people appear to be happier when inflation and unemployment are low. As well, the unemployment depresses happiness more than does inflation which is always generates the previous one. Relating: Unemployment, considered as a close relative aspect in the short term, which has an inverse correlation to the inflation, is also one of the critical aspects that closely related with my research. Rather than talking about the cause and effect of the inflation, the article stands exactly on the opposite side to analyze the issue; through investigating about people’s happiness which generally influenced by the unemployment-inflation situation directly and easily. The article on one hand helps me with understanding the relationship between the unemployment and inflation, on the other hand, the data gives me a clear view about how inflation influence people’s thought. According to the data from Economicshelp.com, inflation has been about 5% until September 2008; however, since the start of 2008, the amount of unemployment increased sharply. Apparently, as unemployment rises, the inflation rate will definitely be reduced. The investment found that both unemployment and inflation lower happiness; however, it is obviously to see that unemployment, as a direct influence to people’s life, depresses well-being more than inflation. As a result, policies and decisions are made by the government to reduce the unemployment, while the inflation rate increased during the descending of the unemployment. In a word, it can be concluded through this investigation that, the unemployment is one of the causes which lead to the inflation.