Inflation less than expected in 2013Date posted: 11/13/15 12:00:00 AM
Policymakers on the Federal Reserve Board were hoping to see an annual inflation rate of two percent this year, Nation Public Radio.
A two percent increase would establish that the nation's economy is on the mend, meaning that some workers would receive raises and companies would be hit with enough consumer demand to raise prices. But the two percent goal was a little too lofty.
The Bureau of Labor Statistics recently released a report of the consumer price index that stated there had been just a 1.2 percent inflation climb over the past year. In fact, November prices did not rise at all, and they dropped slightly in October.
Yet economists are stating that low inflation - while it does pose certain advantages - is not always a good thing.
"If inflation is lower than expected, then debt financing is more burdensome than borrowers expected," said Charles Evans, president of the Federal Reserve Bank of Chicago. "Problems of debt overhang become that much worse for the economy."
Why is the inflation rate lower than expected?
"There is no widely accepted reason why inflation is running as low as it is in the face of extraordinarily accommodative policy from the Fed," said James Bullard, president of the Federal Reserve Bank of St. Louis.
Wage and price restraint has been connected to a range of factors. Relations between the Americas and Iran seem to be on the mend, and energy prices have fallen as U.S. companies have produced more oil and gas in 2013.
Another key contributor is the nation's unemployment rate, which is hovering at 7 percent. With so many people still looking for work, and a great number willing to accept jobs they are overqualified for, many companies don't need to raise wages in order to attract potential employees.
"Demand is still soft in most parts of the economy and businesses are wary about raising prices," said Stuart Hoffman, chief economist at PNC Financial Services, according to NPR. "At the same time, wage growth is weak and input costs are not increasing, while profit margins are solid, giving firms the ability to hold the line on prices."
What's bad about low inflation?
"Falling and low inflation can be very bad for an economy," said the Federal Reserve's Chairman, Ben Bernanke.
The majority of U.S. employees would probably appreciate a slight rise of inflation because for many, it would likely mean a raise. A larger paycheck eases consumer doubt and helps them pay off prior debt. Less debt and more pay then translates into personal spending, which would give the economy a needed boost.
Surprisingly, low prices can also impact consumer reaction, which can hinder the economy. When inflation begins to climb, shoppers feel motivated to get to the store and buy what they need, which helps stimulate growth. When prices remain flat, many consumers sit on their money and wait for lower sale prices.
The positive side of inflation
Inflation can inspire optimism among consumers. Seeing home prices rise or an asset appreciate in value can boost consumer confidence, which typically leads to more spending. Inflation can also help keep interest rates at bay, making it more cost-efficient for individuals looking to make a major purchase such as a home or a car.
"A sustained burst of moderate inflation is not something to worry about," said Kenneth Rogoff, an economist at Harvard, in a recent article for Project Syndicate. "It should be embraced."
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