The recent
CNN news article about the inflation rate being too low, interviews James
Bullard the president of the ST. Louis FED. The national inflation rate was 1.3
according to the FED’s report in February. According to Bullard the rate is to
low and is currently still going down. He said, “If it doesn't start to turn around
soon, I think we'll have to rethink where we stand on our policy.” Without
taking Macro, I would have no clue that he was talking about. However I now
know that there is a strong correlation between inflation and unemployment. As
inflation goes down unemployment goes up. So what Bullard is saying makes sense
because our economy is currently trying to recover from the last recession and
our unemployment rate is above 7%, which is considered very high. With the
inflation rate continuing to drop that means the unemployment rate will
continue to go up which is the opposite of what the economy needs right now to
get us out of the recession.
According to Bullard in the article
the FED aims to keep the inflation rate at roughly 2% each year, but because of
the economy he has proposed raising it to 2.5% which would in turn lead to
lowering the unemployment rate. In the article they talk about how the FED has
the power to increase and decrease their spending based on the economy.
Currently the FED buys “$85 Billion in treasury and mortgaged-backed
securities, in an attempt to lower long-term interest rates and stimulate more
spending.” Bullard backs his proposal of increasing the inflation rate if it
becomes dangerously low. His policy has no end date, which shows that this is not
just a simple fix to the problem. It will take time and other factors to rebuild
the economy and lower unemployment. Since the economy can easily be altered by
different policies and in some cases without knowing how much it will be
affected, officials have to be careful before they implement their policies. Bullard
has even said that it is getting so low that the economy may be on a path to
deflation, which may put us, right back into another recession.
However I can see where critics of his plan have a
problem. According to the LRPC when inflation increase the unemployment rate
decreases, however over time the unemployment rate will return to the natural
rate of unemployment and the inflation rate will stay at the higher percent.
Which means that if the FED increases the yearly inflation rate from 2% to 2.5%
the prices of items will increase that much. Since I’m no economist I do not
know how much that will affect our economy or our/my daily life. What I do know
however is that if the inflation rate continues to fall, which Bullard predicts.
The unemployment rate will only further increase which is not good news for
college graduates across the country. It
will also propel the country into another recession.
Source:
Kurtz, Annalyn. "The Fed's Bullard thinks inflation is dangerously
low." CNNmoney.com. CNN, 17 Apr.
2013. Web. 17 Apr. 2013.
<http://economy.money.cnn.com/2013/04/17/
the-feds-bullard-thinks-inflation-is-dangerously-low/?iid=SF_E_River>.
The rise in unemployment rate and decrease of inflation rate is primarily due to foreign countries struggling with their own economy. Most of the countries in the world have been hit hard in recent times trying to keep other countries afloat or bubbles bursting. The economy of each country affects foreign imports and exports as in the article I have read talking about the federal spending shows that the US private sector is strong, but the foreign trades is weak. The US economy is one of the leading economies in the world and it’s a domino effect to other countries because the world has become globalized.
ReplyDeleteThe aggregate demand created from the government spending, consumer consumption, investments, and foreign trade significantly affects the economy. Apparently the significant boom from the consumer and investments is not enough to outweigh the decrease in government spending and the decrease in foreign trade. However, it shows that once other countries get their economy back on track, the foreign trade demand will pick up and help other countries economy recover.
The low inflation rate is lower than what it should be, but realistically the low inflation is needed to prevent prices from skyrocketing. As stated in the article, the unemployment rate will return to the natural rate, but the inflation rate will stay towards the higher end. Higher prices cause a lot of panic from the public and cause a lot of problems the government has to deal with already. However, the second to last sentence of your critique is not necessarily true when we looked at the statistics in class. It shows that college grads are least susceptible to an economic recession, but the people with high school diplomas or below are more susceptible, while employment of teenagers are significantly affected. The unemployment of teenagers is above 25% account for a portion of the high unemployment rate. The other categories have about the unemployment rate as the national average, while college grads are much lower.
The unemployment rate of college graduates includes students with majors that are not exactly career friendly in the real world. Many college students do find jobs especially the science and business majors. We have to worry about the less educated people who make up the majority of the unemployment rate and continue with our lives letting the other countries slowly recover so the foreign trade market picks up again.