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HOW RISING INFLATION AFFECTS THE ECONOMY
The question of whether high inflation will result from the economic turmoil
brought forth by the lingering pandemic and subsequent near-shutdown of commerce for
an extended period is becoming more concerning. Everywhere you look right now, prices
are rising: from groceries to housing to the price you pay at the pump, the cost of goods and
services have been rising at an alarming rate since the beginning of the year. This article
provides insight on how inflation impacts the global economy.
One needn’t be a soothsayer to tell that we are on the precipice of an inflationary period,
what with the headlines and latest economic statistics trumpeting that such an event is
imminent. Many economists are skeptical of President Biden’s 1.9 trillion dollar stimulus
plan, predicting that there will be serious repercussions. However, Janet Yellen, Secretary
of the Treasury, keeps trying to assure us that the United States is on watch and well
equipped to combat inflation. But we know this to be true; rising costs and higher rates do
not come without consequences.
President Biden’s plans and policies have been subjected to scrutiny from myriad
economists. They fear that the President’s stimulus initiatives may over stimulate an
economy already showing signs of recovery now that vaccines are ticking up and a return
to “normalcy” appears to just around the corner. Consumers, sick of a year of lockdown,
are raring to get out and consume; to dine out, shop, be entertained, and travel. Businesses
are reopening at near-to-full capacity and sporting events are allowing fans in the stands
again. Restaurants are phasing out limited occupancy restrictions, and everywhere you
look you see what appears to be a pent up and voracious demand for these things.
Manufacturing, on the other hand, has been operating at reduced capacity and, as a
result, companies are experiencing supply bottlenecks and are unable to keep up with the
growing demand. Consequently, the price for goods and services is increasing. It is
Economics 101: Supply vs Demand.
The author chronicles this by providing incidences of inflation, stating that space on
container ships is up 180% over the year prior, and a semiconductor shortage triggered by
this year’s surge in demand for tech equipment – brought on in part by the surge in
demand for computer and IT equipment necessitated by a large percentage of the
workforce being thrust into finding ways to do its job from home offices – is causing delays
in the production of vehicles, computers, and smartphones. He goes on to emphasize that
Brent Crude oil prices have risen above sixty dollars a barrel for the first time in over a year
after bottoming out below twenty dollars a barrel at this time last year.
When inflation rears its ugly head, interests rates rise. In 2011 the European Central
Bank erroneously raised rates in response to a temporary spike in inflation, with near
disastrous consequences. Greece and Italy’s economies crumbled, threatening to take the
global economy with it and they still haven’t recovered. In the article the author explains
why this is problematic, as temporary increases in prices embolden fiscal hawks who are
often complacent about the dangers of a weak economy.
In America, where increasing inflation expectations and a faster recovery mean price
increases are more likely to be persistent, higher inflation could trigger monetary policy
Federal Reserve has vowed to keep interest rates low and will continue purchasing bonds
in order to compensate for today’s shortfalls. However, the current “average inflation
targeting” regime precludes a long-term or significant overshoot. To tamp inflation back
down, the central bank will eventually have to increase interest rates. The Author’s main
message, which seems self-evident, is that high inflation rates negatively impact the
economy and the markets. And while Biden’s ambitious stimulus packages are still needed,
especially when it comes to beginning the long overdue process of restoring the nation’s
crumbling infrastructure, he must persuade Congress, corporate America and the American
public to accept higher taxes to pay for it all – always a difficult and unpopular task – or
there will be very real and possibly severe consequences which could lead the nation back
into a recession.
From what I have learned from this article, and in this course, higher interest rates can
have far-reaching consequences, not only for financial markets here and globally, but for
each of us. We have become dependent on easy money, so much so that our economy and
almost everything in today’s financial world is predicated on central banks maintaining low
interest rates for an extended period of time. The notion that the government can spend as
much as it wants, including President Biden’s proposed infrastructure bill, is based on this
notion; that cheap capital, which also informs today’s steep stock market prices and
plentiful credit, will be around forever.
While free money, in the form of easy, near zero-percent credit and life-raft stimulus checks
for anyone who can fog a mirror is enticing, it is not sustainable. It seems to me at some
point a reckoning awaits, and when it eventually comes, this economic house of cards –
built seemingly of smoke and mirrors and coupled with the lack of political will to enact
and adhere to sound fiscal policy – will come crashing down on all of us.
The Original Article
Inflate gate: How rising inflation could disrupt
the world’s economic policies
The debate is hotting up
Source: The economist.com,
The debate about whether high inflation will emerge out of the pandemic is becoming more
pressing. In January underlying prices in the euro zone rose at their fastest pace for five
years. In America some economists fear that President Joe Biden’s planned $1.9trn
stimulus, which includes $1,400 cheques for most Americans, may overheat the economy
once vaccines allow service industries to reopen fully. Emerging bottlenecks threaten to
raise the price of goods. Space on container ships costs 180% more than a year ago and a
shortage of semiconductors caused by this year’s boom in demand for tech equipment is
disrupting the production of cars, computers and smartphones.
Headline statistics on price rises will soon contribute to the sense that an inflationary dawn
is breaking. They will go up automatically as the collapse in commodities prices early in the
pandemic falls out of comparisons with a year earlier, and the recent rise in the oil price
begins to bite—on February 8th Brent crude rose above $60 a barrel for the first time in
more than a year. In Germany the reversal of a temporary cut in vat has already helped
year-on-year inflation rise from -0.7% to 1.6% in a month.
For most of the past decade the world economy’s problem, judged by central banks’ targets,
has been too little inflation, not too much. As a result it is easy to view the coming
acceleration in prices as welcome. In fact, it is worth worrying about, for several reasons.
One is that it weakens the hand of those arguing for more fiscal stimulus in places that need
it. There is little prospect of the euro zone sustaining higher inflation, for example. Its main
rate of interest has not been cut during the pandemic and its deficit spending remains
inadequate given its economic outlook and lack of monetary firepower. Much as the
European Central Bank mistakenly raised rates in response to a temporary burst of
inflation in 2011, the danger this time is that a temporary acceleration in prices emboldens
fiscal hawks who are complacent about the dangers of a depressed economy. The same
danger lurks in Japan, the archetypal low-inflation economy. Its prices started falling
during the pandemic. Japan will probably escape deflation this year, but beyond that it
looks destined to remain in a low-inflation trap, having seemingly given up on its brief
attempt to spring out of it in the mid-2010s.
Higher inflation could also cause gyrations in monetary policy in America, where rising
inflation expectations and a faster rebound mean price rises are more likely to prove
persistent. Financial markets imply a one-in-five chance that consumer prices will grow by
at least 3% per year on average over the next five years. The Federal Reserve has promised
to keep interest rates low and to keep buying bonds because it wants inflation to overshoot
its 2% target, in order to make up for today’s shortfalls. But its new “average inflation
targeting” regime does not allow for an enduring or large overshoot. Eventually the central
bank will want to raise interest rates to bring inflation back down.
The faster prices rise this year, the sooner that tightening could come. Richard Clarida, the
Fed’s vice-chairman, has said that the central bank will make up only for inflation shortfalls
that have occurred over the preceding year, meaning the point at which catch-up is
complete could come surprisingly quickly. On February 7th Janet Yellen, the Treasury
secretary, tried to reassure critics of Mr Biden’s stimulus by saying that America has the
tools to deal with inflation. But higher rates are not without consequence, and if the Fed
finds itself pouring cold water on an overheating economy, the risks of another recession
Higher rates also hold deep implications for markets. Almost everything about today’s
financial landscape is premised on central banks keeping interest rates low for a long time.
Cheap money lies behind the idea that the government can spend however much it likes—
including, say, on Mr Biden’s planned infrastructure bill—and underpins today’s sky-high
stockmarket values and abundant credit. An abrupt change in the interest-rate outlook
would be painful, as it was in 2013 when the Fed’s hawkish comments led to what became
known as the “taper tantrum”.
On Wall Street higher rates would be a shock. In emerging markets they would be
agonising. Many have been experimenting with unconventional monetary policy and bigger
budget deficits, following the rich world (see article). But their efforts assume that global
financial conditions will stay loose. Higher interest rates in America to see off inflation
would mean a stronger dollar and capital outflows from emerging economies, as in 2013.
This would imperil their finances and make it harder for them to fight the effects of the
pandemic. There is a lot to like about the idea of escaping the low-inflation, low-rate
paradigm of the past decade. But higher inflation will expose the world economy and
financial markets to a bumpy ride.
this is what you nead to write the paper
For the term paper students will choose an article related to any of the topics we have covered in the online coursework. The articles could be found on
msnbc.com, nytimes.com, economist.com., cnn.com. You may also find articles on local newspapers as well. Or a google search will help students find
articles on the current economic events easily.
After you pick an economics article from the internet or from local newspapers, you are required to write an analysis of the article you have selected to
work on. You will find the detailed explanation on how to write an analysis of an article below.
Students may work together for the term paper and bounce ideas off each other or discuss the articles together; however, each student must submit
their individual paper written on their own. Besides, every student must pick up a different article.
Make sure you include the article you have chosen at the end of your paper. Please copy and paste the article at the end of your paper. Do not just give
a webpage link, as there may be some technical issues or subscription issues on certain websites (for example New York times, there is a limit for
maximum number of free articles you can read per day) and the article would not open on my computer.
Papers submitted without the related article the student has chosen will not be graded.
The length of the paper will be minimum 5 paragraphs and 1-3 pages, 1.5 space and 12 size fonts. If you use other resources to back up your opinion,
you must cite the resource in APA style. If you need help with APA style formatting, you may contact writing center or go online
https://owl.purdue.edu/owl/research_and_citation/apa_style/apa_formatting_and_style_guide/general_format.html The paper is your own
understanding of the article based on what you have learned in class.
Minimum of 750 words.
How to write the paper:
Step 1: Read the article you have found on any of your resources. Make sure you comprehend the article well. Try to investigate
and find out the meaning of any concept or term that you do not know that is mentioned in the article.
Step 2: Start writing your draft. Here is how:
o Give your own paper a nice title.
o The first paragraph will summarize the original article.
o In the following paragraphs you will make an argument/ evaluation in your analysis using appropriate terminology.
o Present your position on the topic. Do you agree or disagree with what is covered in the article?
o In the last paragraphs, paragraph 4 or 5 make your recommendations. Or you may open up the floor for further questions/dicsussions
o Please make sure you refer to the concepts/terms we have learned in this course, while you are making your analysis on the article.
o Please make sure to explain how the concepts handled in the articled along with the ones we have learned in class would help students develop
personal responsibility, social responsibility and civic responsibility in the context of our economy
There is no need for a separate cover page or abstract/ summary page. You need to give a title to your paper.
Make sure you write your name, your course name and course section along the with the title and author of the article you have chosen to write on.
Step 3: Copy and paste the entire article that you analyzed on your paper at the end of your Term Paper.
o Remember to add a link to your article and
o Remember to write the name of the article, the author of the article, cite where it was published and the date as well.
**Please remember not to use the same articles in the sample papers.
** Please also keep in mind that wikipedia.com, encyclopedia.com or investopedia.com type of resources are not accepted as a valid sources for your choice of an economics article.
and the artical that I want it to do the paper
An economic shock just hit the housing market
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