Therate of inflation plays a critical role in the determination of thehealth of the economy. When a state is experiencing high rates ofinflation, it is said to be experiencing hyperinflation. When such ascenario occurs, the economy is in most cases nearing a collapse.Still, when an economy is experiencing moderate inflation, there is arapid erosion of purchasing power. There is also the creation ofuncertainty in the market because businesses find it difficult toestimate costs. Ideally, high and low rates of inflation present asituation where the economy is not operating optimally and need to beaddressed. This paper seeks to elaborate on the issue of inflation bydiscussing the problem with data and information about inflation aswell as the point of view by different authors on the issue.
refers to the depreciation of the value of the unit of a currencysuch that more units of currency are needed to purchase a similaramount of goods and services in comparison to the past (Andonov Etal. 28). In simple terms, inflation refers to a rise in the cost ofgoods and services that are essential for people to live and enjoylive. Measurement of the rate of inflation is usually throughinflation index. The consumer price index is the most popularinflation index in use in the United States. In comparison to therest of the world, the United States has enjoyed a lower inflationrate of three to four percent in the last few years (Azar 400). Theselow levels of inflation are as a result of complex factors such asthe use of the United States currency as the reserve currency for theworld (Azar 388). Low rates of inflation are advantageous to a statein several ways. A low inflation rate tends to encourage people tolower high debts and gain more financial responsibility according toTas et al. (445). As the inflation rates become less, there is lessadvantage associated with holding large debts. As the inflation ratesfall, people ought to clear their debts because maintaining thembecomes expensive for them (Tas Et al. 447). Again, as the rates ofinflation fall, the rates of interest fall as well. It is, therefore,imperative for people to clear their debts as the rate of inflationdeclines because of the subsequent low-interest rates to reduce theoverall costs of servicing the debts.
Itis important to understand that the reason for falling rates ofinflation is crucial for a proper comprehension of its consequences.If the fall of rates of inflation is due to a decline in theaggregate demand, the United States is highly likely to experience aslower economic growth and subsequently, recession (Pontiggia 248).Such a case is detrimental and results to high levels ofunemployment. The effects are adverse when the rate of inflationcontinues falling because it may lead to deflation according to ChoiEt al (935). People anticipate lower prices in the future and arethus reluctant to spend in the current period resulting in slowergrowth. However, if the fall in the rate of inflation is due toimproved technology and productivity, it becomes beneficial to aneconomy (Tas Et al. 450).
Thereare instances in which high levels of inflation are inevitable.Although these high rates of inflation are beneficial to thegovernment, they pose adverse effects to the economy. When the rateof inflation goes up, businesses are forced to raise the costs oftheir products. Banks are also forced to raise the rates of interestduring high inflation to be able to operate profitably (Choi Et al.955). The implication of the high-interest rates is the failure ofbusiness operations leading to high levels of unemployment andadverse effects to the economy. The effect of high inflation is feltby every person not only as a result of increased costs and highrates of unemployment but also due to the time lag before getting anincrease in the cost of living (Andonov Et al. 35).
Withhigh inflation, people have the tendency to spend money before ananticipated loss of value and end up buying products they do notrequire as a way of preserving the value. In times of high inflation,people get into high debts and in most cases miss out on saving.Although such scenarios stimulate the economy of a state in the shortrun, the results are poor choices and an economy which is lesseroptimal because people concentrate more in the short run failing toplan for the long term (Choi Et al. 957).
Manyauthors argue that low inflation is better for consumers as opposedto high rates of inflation. However, it is arguable that lowinflation rates result in uncertainty just as high inflation(Pontiggia 251). The truth is that a steady rate of inflation despiteits level, as long as it can be guaranteed to remain stable, is theinflation rate that does not result in uncertainty. The argument ofscholars on the issue of uncertainty of inflation rates stems fromthe fact that whether the rate is high or low, there is no guaranteethat the rate will not go higher or lower (Tas Et al. 457). In such acase, uncertainty will always exist. In a bid to eliminateuncertainty in inflation rates, the FED sets a steady rate ofinflation to be two percent (Azar 387).
will always be a cause for concern in the economy whether it is low,high or steady. When the rates are high, there are measures appliedto reduce the rate, and when the rate is falling, there are equallymeasures to raise it to an optimal level. There are also measuresapplicable when the rates are steady to ensure they remain at thatlevel. FED, which is responsible for setting measures aiming atachieving a stable inflation rate has set the rate to be at twopercent. Although there has been little success in achieving therate, FED ensures that the rate is close to two percent to achieve anoptimal economy.
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