EconomicsNews Analysis: An Increase in the Rate of Inflation in the U.S
EconomicsNews Analysis: An Increase in the Rate of Inflation in the U.S
Therate of inflation is a key indicator of changes in the price of keycommodities, especially those that are consumed on a daily basis.Although it is common for the rate of inflation to increase, anexponential rise can be detrimental to the national economy and thewell-being of the citizens. Inflation is defined as the generalincrease in the price of services and goods in a given economy,coupled with a fall in the purchasingpowerof its currency Guimon, J. (2016). The news article “U.S. inflationpicks up due to gasoline, rent” that was authored by Jeffy Bartashand published by the Market Watch, indicated that the increase in therate of inflation in the U.S. has affected the price of the mostimportant commodities. This paper will seek to answer the question,“how will the rise in the rate of inflation affect the lives of thecitizens of the U.S.?” The paper presents an argument that the risein the rate of inflation will increase the inequality in wealthdistribution, hinder the inflow of foreign direct capital, and lowerthe quality of life of the low as well as the medium-incomehouseholds. However, it will boost domestic production in thelong-run.
Inequalityin the distribution of wealth
TheU.S., similar to other countries, has been struggling to bridge thegap that exists between the wealthy class and the low-incomehouseholds. It has been reported that the U.S. has the largest gapbetween the poor and the wealthy citizenscompared to other developed countries (Bartach, 2016). A rise in theinflation will worsen this scenario by facilitating theredistribution of wealth in the favor of the rich. According toBartach (2016) the rise in inflation is attributed to two factors,namely the increase in the cost of gasoline and rent. The market forthe two commodities is controlled by the wealthy class. For example,the cost of extracting and distributing gasoline act as a barrierthat preserves the market for the rich investors, while rental housescan only be controlled by the owners of the factors of production. InJune 2016, the price of fuel increased by 1.2 %, while that ofresidential premises went up by 3.8 % (Bartach, 2016). This change inprices benefited the rich investors who control the two products inthe market by increasing their financial gains.
Thelow-income households, on the other hand, will lose their resourcesto the owners of the factors of production by paying higher rent andfuel charges. For example, it is estimated that about 110,175,847Americans live in rental houses, which implies that an increase inrent has affected approximately 37 % of the U.S. population(Obrinsky, 2016). Trends also indicate that that number of citizenswho cannot own homes will continue to increase in the future. Thepoor people will continue losing their hard-earned wages to landlordsand investors in the energy and real estate sectors.
Impactof inflation on the foreign direct investment
Changesin the rate of inflation have a negative correlation with the inflowof FDI. The increase in economicinterdependence in the contemporary business environment has made FDIa key component in the list of strategies that the governments use tostimulate a growth in GDP. The U.S. have been applying severalstrategies (such as intellectual property rights, financialincentives, and human capital development) to attract foreigninvestors since the 2008 financial crisis (Guimon, 2016). The primaryof objective of these measures has been to expand the domestic labormarket, but the rise in the rate of inflation might thwart thegovernment efforts to attract more FDI.
Arise in the rate of inflation is associated with an increase in thecost of factors of production, which discourage foreign investors. Inthe present case, a rise in the price of gasoline resulted in anincrease in the cost of production(Bartach, 2016). This is because gasoline is a natural resource thatis used to run factories and vehicles. Any increase in the price willaffect producers of different goods and services directly, which willforce foreign investors to look for alternative international marketsthat have lower inflation rates. By scaring away foreign investors,inflation will limit the capacity of the U.S. to achieve theobjective of stimulating its domestic economy through the FDI.
Impactof inflation on the quality of life
Thequality of life is highly influenced by the ability of the members ofthe society to afford the basic commodities that they require on adaily basis. However, the accessibility of these commodities (such asfood, shelter, medical care, transport, and clothing) depends ontheir income earning capacity and the relative price in the market.An increase in the rate of inflation that is not followed by a risein the minimum wage reduces the buyingpower of the low-income households.It has been reported that the price of the clothes is among the keyitems that were affected the most by the consumer price index thatrose by 0.2 % in May 2016 (Bartach, 2016). Since there is nocommensurate increase in the minimum wages, the poor members of thesociety will have to spend more out of their usual earnings in orderto buy clothes. The same report indicated that the price of used carswas not affected by inflation, which suggests that the low incomecitizens will have to void buying new cars and go for the oldautomobiles (Bartach, 2016). This is clear indication of a decline inthe overall quality of life that has affected the low-incomehouseholds disproportionately.
Inaddition, the U.S. has been struggling for decades to enhance accessas well as the affordability of the health care services, but a risein inflation has made things worse. The lack of access to adequatehealth care services translates to a poor quality of life. Accordingto Bartach (2016) the cost of medical care was listed among the itemsthat were affected by an increase in inflation. About 60 % of theoverall rise in inflation covered priced that were paid for servicesfrom the medical visits, rent, and airline fares (Stilwell, 2016).Most importantly, the rise in the cost of medical visits willcontinue to deteriorate the health as well as the overall wellbeingof the citizens.
Effectof inflation on domestic product
Althoughmany U.S. citizens fear that an increase in inflation will subjectthem to the risks of poverty, inaccessibility of medical care, andinequalityin the distribution of resources,it will have a positive impact in the long-run. Inflation willstimulate domestic production by motivating the local investors toproduce more in order to take advantage of the high prices. Studiesshow that an increase in inflation and a growth in domestic economyare positively correlated (Niazi, Riaz, Naseem & Rehman, 2011).This phenomenon is attributed to the fact that people invest more inproductionof commodities that they speculate will experience an increase inpricesin order to make windfall financial gains. An increase in domesticproduction is associated with a risein the rate of employment,which is an indirect benefit of inflation. However, the benefit ofemployment is only realized when the rate of rise in inflation iswithin the reasonable limits. According to Bartach (2016) the rate ofinflation may appear high to consumers, but it is still withinmanageable levels. Therefore, the current increasein commodity pricesis likely to stimulate the domestic economy.
Arise in the rate of inflation has affected the U.S. people negativelyby increasing inequality in wealth distribution, lowering the qualityof life, and hindering foreign direct investment. Inflation has increased in the U.S. following a rise in the price of keycommodities, including the gasoline and rent. Inequality in wealthdistribution will result from a scenario in which the rich owners ofthe factors of production (such as the rental premises and gasolineextraction facilities) will earn exorbitant profits at the expense ofthe low-income households. The decline in the level of quality oflife will affect those who cannot access the basic commodities, suchas rental houses and medical care. Unfortunately, almost half of theU.S. population is at the risk of a decline in the quality of life.The domestic market will also be hurt since inflation will discourageFDI. However, inflation is likely to stimulate domestic production aslocal investors try to take advantage of the high prices.
Bartach,J. (2016, June 16). U.S. inflation picks up due to gasoline, rent.MarketWatch.Retrieved July 28, 2016, fromhttp://www.marketwatch.com/story/us-inflation-climb-02-in-may-cpi-shows-2016-06-16
Guimon,J. (2016). Governmentstrategies to attract research and development intensive FDI.Washington, DC: Global Forum on International Investment.
Niazi,G., Riaz, S., Naseem, M. & Rehman, R. (2011). Does an inflationand growth of a country affect its foreign direct investment? Journalof Management, Economics, and Finance,1 (1), 1-7.
Obrinsky,M. (2016). Quick facts: Resident demographics. NationalMultifamily Housing Council.Retrieved July 28, 2016, fromhttp://www.nmhc.org/Content.aspx?id=4708
Stilwell,V. (2016, May 17). Consumer prices in U.S. climbed in April by mostsince 2013. Bloomberg.Retrieved July 28, 2016, fromhttp://www.bloomberg.com/news/articles/2016-05-17/consumer-prices-rise-by-most-since-2013-as-u-s-inflation-stirs