The article I chose was about the
death of inflation. It describes how Margret Thatcher used high interest rates
in the 1970's to beat the never ending war with inflation. Seeing the success that
Margaret had, the Federal Reserve, decided to try a similar tactic in order to
lower inflation rates within the U.S. These acts of decreasing inflation from
the United Kingdom and the States let the markets know that their governments
were determined to keep inflation low. However, mild recessions and long expansions
were the cause of price increases around central-bank targets. Now we are
finding that relative price stability could actually be adding to the rich
world’s economic anguishes.
The recent recession was expected
to have brought inflation rates down with the reduction of wage demands as a
result of work-less laborers and slashing of prices to clear stores of their
unsold goods. With these changes, economist figured that inflation would go
down to zero and they even hoped it would go into the negative. In fact in
2009, the IMF forecast that inflation would be -0.2% for those with advanced
economies. However, much to their dismay it barely budged across the business
cycle as seen in the left-hand chart. The fact that the inflation rates barely
moved is a good example of how things never go the way want them to go when we
plan for them. In our economics book it states that when inflation is expected
to decrease or increase, it will only ever move up or down by the tiniest
amount. However, it is when we do not expect inflation to move that it takes
everyone by surprise and either increases or decrease greatly causing issues among the affected governments.
The IMF characterizes deflation as
the “dog that didn't bark”, because when the U.S.’s unemployment rate rose
between 1980 and 1982, by 6.8%, core inflation went down from 12% to 4.5%. Most
recently we saw the jobless rate increase significantly from 2007 to 2009, but
inflation dropped by less than one percentage point. Even though inflation
rates increased above or decreased below what many country’s central banks had
predicted, the expectations of future rates were still able to stay close to
their predictions.
According to some economists, the
stable inflation rates can be a direct result of some of the big changes that
have been happening within the labor markets. As a result of jobless workers
exiting the labor force for good, wages and prices have not fallen with in the
past few years, thus causing over-generous welfare benefits and outdated
skills. Those without skills that are up to date are unable to compete with
others for the jobs offered, resulting in inflation rates not being able to be
dragged down.
Another view on the stability of
inflation is that it reflects central banks’ credibility. When central banks
adopted low targets for inflation in the 1980's, they firmly anchored beliefs
about future growth in prices and wages. With a low target inflation rate in
mind, employees pushed less for higher wages because they expected prices to
rise. Knowing how their employees felt, firms were able to keep costs and
prices down. When unemployment rose in the 80’s, this process actually helped
avert deflation, because employers had anticipated stable wage demands, thus
resulting fewer price cuts.
The link between inflation and know
economic indicators has grown weaker as inflation rates have become more
anchored throughout the years. In the right-hand chart, the IMF shows a study
of the twenty-one richest countries since the 60’s, showing that changes in
unemployment influence inflation a lot less than it once did.
Reference
Mary K. Sadler
This article synopsis was clearly written and understandable. To start, the graphs were a great way to know what the original article main point was, as well as clarify the points that you make in you synopsis. More of the article could have used this to clarify the points that both the authors and themselves were trying to make. This article uses an interesting comparison between the tactics Margaret Thatcher used and the United States’ Federal Reserve. But as the history proves us, even when we try our best, the business cycle will fluctuate at the rate it wants to.
ReplyDeleteThe second paragraph begins with what we expected to happen in this more recent recession. We hoped that inflation would decrease of even reach a negative percentage. Instead, even through out all the job loss nothing adjusted. An aspect that could also have been analyzed could have been what that meant to the people. Instead of having the dollar mean more in times when people had less, it means that the poverty levels were huge and surviving became harder.
Another aspect that would have been good to analyze would have been what this recession did to the range in income. For example, today the top quartile of people make 450% more than the bottom. Is that because of this recession? Maybe it is because the strength of a dollar has changed so much that those in the top 2 quartiles were not affected enough to matter, but the lower ones were hit drastically.
The business cycle consists of 4 aspects; expansion, peak, contraction, and trough. While they are not consistent in their fluctuations they do always fluctuate in that order. The argument can be, and has been made, that policy makers intervening might hurt the system more than help. We have seen with our rapidly declining economy, the FED has not been as successful as they hoped. In this article they discussed how different recessions affected us then and how. This business cycle is an efficient way to follow the patterns over time.
The synopsis on how stability reflects central banks’ credibility is also interesting. Shaky markets make people more nervous to buy, and then they save more because of lack of trust in their banks. If the credibility of the banks is lost this same thing will happen. Then no matter of the banks efforts, people will stop spending, increase saving, and the banks will be in trouble.
Overall this synopsis was written well, and if the original was also written well.