Inflation in Detail in the United States

Abstract

  The purpose of this paper is to analyse inflation in the US from the following aspects: time period, background, causes, relevant theory and policies. We find major inflationary periods in the US were primarily caused by cost-push inflation. In addition, discussion on Phillips Curve gives us significant understanding about the relationship between unemployment rate and inflation rate. Last but not least, due to great damage high inflation can bring to the economy, we also specify various policies that combat inflation from government’s point of view.

1 Introduction

  Never dose the inflation fail to fascinate people’s attention. Many economists have published papers on this topic. Inflation actually has effect on every aspect of economy. In this paper, we will talk about inflation in detail in the United States and make discussion on several questions.

2 Inflation in the US

 2.1 Definition of inflation

  The term "inflation" refers to rising prices of essentials such as wheat, milk, meat, clothing, medical services, coffee, electricity, etc. or, alternatively, the decline in value of money so that it takes more dollars to buy the same goods and services. the major effect of inflation is that a nation's nominal currency loses value. That is, it takes more Dollars, or Pounds Sterling, or Euros, or Yen, or Swiss Francs, to buy the same quantity of goods. In a word, high inflation causes huge damages to the whole economy and people’s life.

 2.2 Historical inflationary periods in the US

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                    chart 1 U.S. Yearly Inflation since 1900

Chart 1 shows the inflation of U.S. from 1980 to 2012. From the chart we can see that three serious inflationary periods happened, the most serious inflation was in the 1910s, and another two are in the 1950s and 1970s. According to The Economist, inflation in the 1950s was resulted when output went above a quite reasonable view of capacity or full employment (William 2007). Expect for these two inflationary periods, there was a Great inflation in 1970, the Great Inflation began and continued largely because monetary policymakers felt constrained to accommodate expansionary fiscal actions (Allan 2005). And the Federal Reserve decided to “maintain long run growth of the monetary and credit aggregates…so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates” (Steelman 2011).  During the 1970s, the postwar period, evidence shows that the quantity theory of money, which proposes a positive relationship between changes in the money supply and the long-term price of goods, continues to provide a reasonable description of the long run average relationships among interest rates, inflation rates, and money growth rates. In 1970s and 80s, the U.S. inflation can be fully accounted for by the corresponding increase in M2 (or M1) growth rates, and the return to relatively low inflation rates in the 1990s can be explained by the correspondingly low average rate of money supply growth in that decade.