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Issue Summary 1

Over time, inflation raises the cost of goods and services by eroding each currency's buying power. It raises one's standard of living expenses. Inflation in the United States has eroded the buying power of the dollar. As a result of rising costs, people's purchasing power diminishes over time, lowering their quality of life. Inflation is the rise or fall in prices, expressed as a percentage, over a certain time period, generally a month or a year. Price increases over that time period were measured using this percentage. The inflation rate which is a component of the misery index is an economic statistic that helps to measure a person's financial well-being and is really crucial. The unemployment rate is also a factor. When the misery index is over 7%, people are either in the midst of a recession or are fighting inflation (Castillo-Martinez, 2019).

Inflation is caused by one of two things. Inflation that is driven by consumer demand is by far the most prevalent kind. In this case, the demand for a product or service is greater than the supply. Customers are prepared to pay more for the goods since they need it so badly. The second, less typical reason for inflation is an increase in the price of goods and services (Bohl, 2018). It is at this point that supply becomes constrained while demand remains unhindered. This occurred as a result of damage to gas supply lines caused by Hurricane Katrina in 2005. The need for gasoline did not alter, but the lack of supplies resulted in a $5 per gallon price increase.

Built-in inflation may also be cited as a third factor. People's anticipation of future inflation has a role in this calculation. Increases in salaries are expected by workers, but also boost the cost of producing a product. Prices for products and services are going up again. When these causes and effects persist, it forms a wage-price spiral.

The Consumer Price Index (CPI) is used by the U.S. Bureau of Labor Statistics (BLS) to calculate inflation (Taylor, 2019). A poll of 23,000 firms is used to compile the index's data. An 80,000-item pricing database is updated every month. The Consumer Price Index (CPI) will give you the overall inflation rate. Inflation is also tracked by the Personal Consumption Expenditures Price Index. In comparison to the CPI, this index covers a broader range of commercial products and services, such as health care services covered by insurance (McLeay, 2020). Only medical expenses paid by customers are included in the Consumer Price Index (CPI).

Monetary policy is used by central banks all over the globe to keep inflation and deflation at bay. Currently, the Federal Reserve in the United States sets a target inflation rate of 2% each year. By allowing a goal inflation rate of greater than 2%, the FOMC said on August 27, 2020, that it will aid in maintaining maximum employment (Siami-Namini, 2019). The target of 2% inflation remains, but the October 2021 rate shows that it is ready to accept higher rates if inflation has remained low for a long period. The Fed uses the core inflation rate, which excludes energy and food costs, to measure inflation. Commodity merchants determine these prices, which are too volatile to take into account.

References (APA)

Bohl, M. T., & Siklos, P. L. (2018). The anatomy of inflation: An economic history perspective. Prepared for the Handbook of the History of Money and Currency (Vienna: Springer), edited by S. Battilosi, Y. Cassis, and K. Yago, Forthcoming, CAMA Working Paper, (8).

Castillo-Martinez, L., & Reis, R. (2019). How do central banks control inflation? A guide for the perplexed. LSE manuscript.

McLeay, M., & Tenreyro, S. (2020). Optimal inflation and the identification of the Phillips curve. NBER Macroeconomics Annual, 34(1), 199-255.

Siami-Namini, S., & Hudson, D. (2019). Inflation and income inequality in developed and developing countries. Journal of Economic Studies.

Taylor, J. B. (2019). Inflation targeting in high inflation emerging economies: Lessons about rules and instruments. Journal of Applied Economics, 22(1), 103-116.

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