Inflation in the US: measurement, current situation

In the economy, inflation is understood as a steady rise in prices for goods and services over a period of time. This leads to a drop in the overall standard of living of citizens. Among the reasons for the rise in prices is usually called the rise in demand with an invariable level of supply, an increase in production costs and expansion of the money supply in circulation. However, there are exceptions. And one of them is inflation in the US, which remains quite low in recent years, despite the country's active monetary policy.

Measurement and indicators

Inflation leads to the fact that money is losing its purchasing power. With each month, people can afford less and less if their salary remains unchanged.

Inflation in the US, as in other countries of the world, is measured using special indices. Its level is in fact equal to the percentage of their change. The Fed is trying to maintain a two-percent inflation in the US. It is believed that this level contributes to the effective expansion of the economy, as consumers have an incentive to make purchases.

Inflation in the United States is determined with the help of two indicators. The consumer price index is calculated by the Bureau of Labor Statistics monthly. In his basket of products includes all the necessary goods and services, from food to education. The second indicator is the index of production prices. It includes commodities such as fuel, farm products (eg meat or grain), chemicals, metals.

In the United States, the concepts of general and basic inflation are distinguished. The first is different from the second percentage increase in food and energy prices.

Inflation has not only positive, but also negative aspects. Among them, the reduction of the burden of the public and private sector, the retention of the nominal interest rate at a level greater than zero and the reduction of unemployment.

Current situation

In October 2016, inflation in the US was 1.6%. This is 0.1% more than in September. However, this level is the largest since October 2014. The main reason was the rise in prices for housing and electricity. Prices for food have been falling for two months. Between 1914 and 2016, the average inflation rate in the United States was 3.29%. The highest rate was recorded in June 1920. Then inflation was 23.7%.

Causes

• Increase in demand with an unchanged supply level. This means that consumers want to buy more than manufacturers can provide. This situation may be related to such factors as: expansive fiscal policy (tax cuts or increase of government spending to stimulate the economy), currency devaluation, active monetary policy (increase in money supply in circulation).
• Increase production costs. The main factor of this type of inflation is the growth of wages. The role of costs for other means of production, other than oil, has been gradually decreasing since the 1980s.
• Also, inflation in the US is driven by consumer expectations. If people expect to increase prices, then the demand for goods and services will increase. Therefore, the Fed sets inflation at 2% per year. This reduces the role of consumer expectations as a factor.

Why is the US inflation rate so low?

It is quite logical that the increase in the amount of money in circulation leads to an increase in the price level. However, if you look at the US economy, this rule is not always respected. The relationship between the creation of reserves and the increase in demand in the United States exists, but since 2010 the Fed has been able to directly influence long-term interest rates. Commercial banks have the right to create additional reserves in the Fed, not only for the purpose of lending to consumers, but also for obtaining a small but stable interest.