In the article “Consumer prices stays even” published in New York Times News (December 16, 2011), it is noted that the consumer price did not change during November, 2011 and therefore, the inflation rate declined. Despite the expectation that the Consumer Price Index (CPI) would increase by 0.1 percent during November, 2011, it remained unchanged. During the 12 months through November, the prices rose 3.4 percent down from 3.9 percent. As a result, the report says that the inflation has taken a nosedive.
However, according to the Federal Reserve, the economical problems in Europe threaten the American economy. The Fed continued to note that slow growth and high unemployment rate might lead to inflation. The soaring prices have instilled panic in the Fed’s economists over an impending rise in inflation.
Economic Concept(s): Consumer Price Index & Inflation
This article is a good example of the economic concept Consumer Price Index and Inflation. According to Mankiw (2012 p. 514), “[t]he consumer price index (CPI) is a measure of the overall cost of goods and services bought by a typical consumer.” It is normally computed and reported on a monthly basis. On the other hand, Inflation is “the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.” (Investopedia, 2011)
The Bureau of Labor Statistics calculates the CPI by fixing the basket, finding the prices, computing the basket’s cost. Then they divide the price of a basket in current year over the price basket in the base year multiplied by 100. Also, they calculate the inflation rate by dividing the difference between the CPI current year and CPI base year over CPI base year multiplied by 100.
According to this article, the CPI did not change in November (0.0 percent) even though it slightly rose from -0.1percent in October. (Bureau of Labor Statistics, 2011) In November, the CPI rose to 2.2 percent after the negative 2.1 percent in October. As a result, the inflation rate is low since 0.1/2.1*100=4.8 percent. In other words, if the inflation is low the country could be more productive by decreasing the unemployment rate.
The unchanged state of the CPI in November is also a projection of economical turmoil in America since there is no significant change in the CPI. The economic turmoil in Europe may be contingent to the increasing inflation in America. The rising price of imported raw materials and services in the European economy causes an increase in the cost of importation for the Americans. This in turn leads to a rise in the commodity prices and hence inflation.
Moreover, the increased inflation can be attributed to raise indirect taxes that are imposed by the American government to her citizenry. For instance, arise in Value Added Tax and fuel duties results into suppliers passing the tax burden to the consumers who bear the brunt of a spiking CPI. Furthermore, the rising cost of labor in the labor intensive American industries due to an increase in wages may have contributed to inflation. If there is no significant increase in productivity to balance the rise in wages, then wage inflation occurs which in turn exercabates inflation of prices since the businesses lack the ability to absorb the shocks imposed by expensive labor.
In addition, America may have accrued debts and international borrowing which forces her to service the loan which is accompanied by interests. This burden of increased prices is once again thrown to the consumers leading to a rise in the CPI hence an increase in price and inflation.