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US economy experiencing inflation as producer prices rise


Chair of Federal Reserve Jerome Powell


The prices of American producers have recently risen by 1% from 0.5% in February, a 4.2% increase from last years figures, the largest annual increase since 2011.


The increase in the PPI figure has yielded a record increase in the price of goods and services of 1.7%.


The PPI figure excludes markets which the US claims are volatile, such as food, energy and trade services, due to this reason, economists seem to prefer it.


However, the core-PPI, which excludes food and energy components, increased by 0.7% from last month.


The rising PPI inflation is likely attributed to cost-push inflation, where the costs of raw materials or other factors of production increase for producers, thus forcing them to reduce their output.


A reduction in output due to increased operating cost occurs as operating budgets are limited, money is scarce, because of this, the aggregate supply decreases consequently yielding a price level increase.


Bloomberg reports that these increased operating costs are because of a raw material shortage, at the same time, producers are dealing with higher shipping costs and setbacks.


This increase in shipping costs is likely temporary as it may be attributed to unregular Suez canal blockage, however, this may be unlikely as the blockage did occur last month.


Nevertheless, the Federal Reserve states that the rising inflation is a “temporary boost,” they have also stated they will be watching the situation if it exceeds the government target.


If inflation does ramp up so much that it exceeds the government target of 2%, a symmetrical target between 1-3%, then, the Federal Reserve will intervene.


The Federal Reserve is in charge of the Monetary policy, so, to lower the inflation rate, the Fed will be able to introduce a contractionary Monetary policy.


This would involve increasing the base interest rate and limiting the supply of money within the economy in an effort to reduce borrowing. A reduction in borrowing and economic activity will consequently lower aggregate demanding, thus yielding a reduction in the rate at which price levels rise.


Perhaps the Fed may find it necessary to do this, as in the coming months and weeks, pent up demand from consumers within the pandemic will likely yield demand-pull inflation within the American economy.


This “pent up demand,” alongside fiscal stimulus packages will likely yield a boost in the inflation rate of the American economy.


Although this may cause the CPI inflation rate to exceed government targets, it may not be an issue for the American government as the rise may be a temporary boost.


Once consumers spend their savings in stores and their excitement dies down, the likelihood is that the economy and the inflation rate will return to desirable levels.

 

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