Good Example Of Yearly Inflation Rate: USA-2005 To 2015 (Albouy 2015). Research Paper
12. What is the Current Price Index – is it rising or falling and what does this mean in terms of our inflation rate? Is there a risk of out of control inflation – why or why not?
A Consumer Price Index (CPI) is a measure indicative of changes in the price level of a basket of consumer goods and services that are most commonly purchased by households. CPI is a statistical estimate constructed on the basis of the price of some sample representative items at a particular point in time, and based on that price, all the other prices changes are relatively measured. Many a times, it is also known as Current Price Index as well, because the index is calculated based on the current price of the items in the basket of goods. For example, currently, in the USA, there are 8,018 items included in the calculation of CPI-U. This basket of goods and services comes from various industries so that the variation of the whole economy is appropriately represented (McCully, Moyer and Stewart 2007). The price of gasoline, coffee bins, tomato, milk, apple, salmon, per unit of electricity, eggs, average house price, medical care are examples of goods and services included in the US CPI basket of goods. Apart from including different items in the CPI basket, weights are assigned to each goods and services based on the volume and value of their consumption. For example, gasoline gets a higher weightage than the price of Salmon fish in the CPI basket.
Figure: Consumer Price Index of the USA between 1913 and 2014 (Albouy 2015).
It can be been seen from the above graph that the CPI of the USA has increased over the years. Especially, the CPI has seen a consistent positive growth between 1970 and 2007 before the sub-prime recession hit the USA. 9.9 cents in 1913 is equivalent to $2.33 in 2014 (Albouy 2015).. However, we can see from the graph that in the last 5-7 years, the CPI is close to 0-1 %. In fact, as per 2015 data, it is projected that CPI will change -0.1% for 2015 primarily owing to the huge reduction in the gasoline price and its cascading effect (Albouy 2015). CPI is supposed to be the primary measure of inflation in an economy. Higher value of CPI signifies high inflation.
In the USA, different types of consumer price indexes are calculated by the Bureau of Labor Statistics (BLS). These include CPI-U (for urban consumers), CPI-E (for elderly people), CPI-W (for clerical workers and wage earners), and C-CPI-U (Chained CPI). All these indices are calculated in two stages. First the BLS gathers data on 8,018 items across 211 different categories at 38 different geographical areas around the country (McCully, Moyer and Stewart 2007). CPI-U and CPI-W weights are only changed in every 2 years. Generally, they are changed in every even year in the month of January. Only C-CPI-U weights are updated every month. Suppose if the consumption of chicken goes up in a month, then in the next month, chicken will have more weight in the calculation of C-CPI-U. On the other hand, CPI-U and CPI-W may not reflect the actual market weighted increase accurately if the consumption of certain items has increased or decreased significantly during the two year period (McCully, Moyer and Stewart 2015). CPI-U and CPI-W are used to correct government employee salary, social security benefits, civil service retirement system, and the federal employee retirement system payouts (McCully, Moyer and Stewart 2015).
Inflation can be of two types; transitory and core. Transitory inflations are short term changes in inflation rates when an economy is going through some changes or correcting itself. Core inflation is the long term trend of inflation for a country or region or economy (McCully, Moyer and Stewart 2007). CPI is one of the measures of inflation, and there are items in the CPI basket of goods that show transitory price shifts like food and energy. If food and energy have higher weights in the CPI calculation, then it will result in higher level of volatility of the inflation figures. For example, countries that depend heavily on oil often see a huge change in the inflation rate when the oil price goes up and down. Although the US economy has a huge oil and energy sector and consumption, still it contributes only a few percentages to the economy. Food and related industries have relatively low weight in the whole economy. Therefore, chances for an out of control inflation or volatility in the inflation rate are not possible currently (McCully, Moyer and Stewart 2007).
Out of control inflation can happen in an economy when the value of the local currency happens against other currencies because of a sustained period of high price levels and high liquidity and volatility in the market. Currently, in the US economy, the inflation rate is almost close to zero for the last several years, and the price is almost constant for most of the items. House price has started showing some traction, but the growth rate is less than 1% (McCully, Moyer and Stewart 2007). This growth is offset by lower oil prices. Therefore, chances of a higher level of inflation in the near future is remote until and unless corporate investment in the US economy goes up significantly or the government injects an enormous amount of money into the economy. Both of these are unlikely, and hence, the chances of an out of control inflation in the US economy are not possible. In fact, there is a chance that if the Eurozone crisis continues and the job market does not improve, the country may enter into a deflationary period.
13. A large part of economic growth is availability of credit and confidence of businesses to grow and expand. Use the following link and one other to report on availability of credit and growth of businesses within the US. Also, Using the Index of Manufacturing Activity, or US Business Confidence, or Crude Oil predictions add to your discussion of business growth http://money.cnn.com/2014/10/16/investing/companies-hoarding-cash-us-economy/
The economic growth of a country is fueled by a host of factors. These factors can be categorized broadly into two areas; 1) Demand Side Factors 2) Supply Side Factors. If the demand for goods and services goes up, then there is a higher demand for goods because of which the consumption level goes up, thereby increasing the economic activity, which leads to an economic expansion (McCully, Moyer and Stewart 2015). On the other hand, for the long term sustainability, a strong supply side is required to create jobs, increase the manufacturing output and inject more money into the system. This helps expand the economic growth further.
Among the demand side factors, interest rate influences the consumption. If the interest rate remains at a low level, then borrowing will increase, firms will invest and people will spend. People will also have more disposable income to spend as they will pay less as mortgage payment. In the US, we have seen near zero interest rates for the last 4-5 years. However, still the overall customer borrowing has not gone up. In fact, only recently, the automobile sector has seen some increased borrowings. The housing sector borrowing is still largely flat at most part of the country. This is because the second demand factor, “consumer and business confidence”, in the economy is lacking.
Figure: Cash in Hand for American Companies (Egan 2014)
We can see from the above figure that, big American companies are holding trillions of dollars as cash, but they are still not confident in the US economy (Egan 2014). This is like a chicken and egg dilemma. Companies are not witnessing any demand from the consumers, because of which they are not investing their cash. As there is not enough cash invested in the US economy, there are not enough jobs created or wage hikes. If the cash would have been invested, then that would have allowed more money into the hands of the consumers, which, in turn, would have triggered a higher demand in the US economy. However, the corporate America is still not sure of their return from the investment, and hence, they are playing a wait and watch game, which is improving the sick economy at a slower pace (Egan 2014).
Demand in the US economy is not increasing because the real wage is falling. Many people, who became unemployed during the 2007-08 recession, later rejoined the workforce at a wage substantially lower than their previous wage (McCully, Moyer and Stewart 2015). It curtailed their ability to spend significantly. Also, in recent years, because the US economy is doing better than the European economy and many other economies, the value of the US dollar is going up against other currencies. Euro, which is the competing world currency of dollar, is not appreciating against dollar. This is hurting the US companies and benefitting companies and countries like China and India that export goods and services to the USA. The US companies are actually losing money by manufacturing and exporting from the US because of a strong dollar (Egan 2014). It is also influencing the investors negatively as they are willing to invest in other countries than the US manufacturing sector because of strong dollar.
Finally, the US banking sector is crucial to the economic growth of the US economy. The banking sector after the shock of 2008 has become extremely cautious. Providing loans to customers and business houses is still the main business of banks, but they have become very cautious. There are small and medium manufacturing industries willing to start operations but lack the capital as banks are not willing to extend loans to a low rated business house. However, 2015-2016 may see a change in that trend as the US economy revives further.
Rising commodity prices may not help the long term economic growth. Oil is one big factor that can hurt an economy if the price of oil goes to a higher level in the coming days. Currently, the US has a higher output due to increased Shell gas output and other inland oil output. This along with OPEC supply is pushing the oil price down (Albouy 2015).. If it stays low for a long period of time, then it will help accelerate the economic growth not only in the USA but across the world. However, if prices remain low and dollar remains strong, then US based oil companies that are exporting may not compete with the non-US oil producers for a long term. Hopefully, an economic growth across the world will make sure that dollar will not remain the only strong currency.
14. GDP per capita alone cannot explain the broader concept of quality of life in a country. There are numerous indices of social wellbeing. Our recent hot topics discussed some very important issues. Please discuss –provide statistics and discuss the ramifications of the following – You can use the information provided by the various groups or do your own research BUT you must support your statements with statistics. Two different facts in each category is sufficient
a. Discuss the health of the United Statesb. Discuss income inequality and its ramificationsc. Discuss poverty and its ramifications
GDP per capita is not a good indicator for the quality of life. However, assuming that a country has a higher GDP level means that the country has a better infrastructure, health level, education, food security and security than countries with a low GDP. Higher GDP, in most of the cases, leads to higher GDP per capita, so the above argument can be extended to GDP per capita as well. However, many a times, it does not make any sense at all. There are countries that have a high level of GDP, but poor quality of life.
Health of the United States
Figure: GDP per Capita (Kenworthy and Smeeding 2013)
The USA is the largest economy in the world. As per the data from the International Monetary Fund (IMF), the USA ranks high (9th) on the GDP per capita (Kenworthy and Smeeding 2013). The country spends maximum of its dollar in healthcare, but still ranks first in the world.
Figure: Healthcare Expenditure (Kenworthy and Smeeding 2013)
Almost 17% of the total GDP of the USA is actually a contribution from the healthcare industry. The expenditure after healthcare per person per year is close to $8,300 in the country. Therefore, anyone can expect that the US will either be first or will rank highly in the healthcare system rankings. However, that is not the case. The World Health Organization publishes data based on health in the populations, financing of health care services and responsiveness. As per that data, the USA ranks a lowly 38th even below Saudi Arabia, Chile and Argentina (Kenworthy and Smeeding 2013). The primary reason of this is that the healthcare process and system are costly in the USA. Even simple doctor visits or small surgical procedures can take thousands of dollars. It is also not easy to get a specialist appointment in the USA. In many cases, especially, for neurological specialists, sometimes the average waiting time for patients can go up to 45 -60 days (Kenworthy and Smeeding 2013). Thirdly, there is not a well-established public healthcare system that is required to ensure that the parallel private healthcare system is efficient and cost competitive. Finally, there are millions of uninsured people who often do not or cannot avail any healthcare infrastructure as it is costly. Therefore, even after a high level of GDP per capita and high healthcare expenditure, the health level at the USA fares poorly compared to other developed countries.
Income Inequality and Its Ramifications
Figure: Income Inequality (Kenworthy and Smeeding 2013)
The above graph shows the income inequality in 1980 and 2012. None of the countries in the list has shown decreasing income inequality. In fact, for countries like the USA, Sweden and Australia, the income inequality has gone up significantly. In the USA, top 1% earners earned 10% of the total income in 1980, but in 2012, it has gone up to 20% (Kenworthy and Smeeding 2013). Although because of the progressive taxation process in the USA, some of the inequalities are reduced, but still the inequality is on the rise. With the same income distribution like 1980, the lower 80% of the income group would have $11,000 more income annually. Although the GDP has gone up substantially between 1980 and 2012, the fruit of growth is not always enjoyed by all. In fact, during the period of 1979 to 2007, the top 1 % of the population increased their income by 275% on an average from their income level in the 1980s. On the other hand, the bottom 80% could increase their income only by 40% during the same period (Kenworthy and Smeeding 2013). Therefore, it can be stated that on an average, in 1979, the overall economic benefits were enjoyed by the greater population, which is not the case currently. The higher quality of life is only enjoyed by a small percentage of people.
Poverty and GDP Per Capita
Figure: Official Poverty Rate by Age (Kenworthy and Smeeding 2013)
The poverty rate in the USA has gone up after the 2007-2008 recession. In fact, after the recession, because of higher level of unemployment, many joined back the workforce at a wage way lower than their previous salary. This has decreased the overall poverty rate by almost 5.5% than the pre-recessionary periods (Albouy 2015). In fact, currently, the poverty rate is only second worst since 1979.
14. Does the US look financially secure? What is the current deficit and debt/GDP ratio? What has been the trend of each?
Figure: US Current Account Deficit (Cecchetti, Mohanty and Zampolli 2011)
The current account balance of the USA has been in negative since the 1980s. In fact, from the time, the US has started importing goods from China and Japan in the 1980s, it has never seen a single year with positive balance on goods and positive current account balance. Before the 1980s, the manufacturing sector of the USA managed to generate huge export resulting in positive current account balance. However, once the outsourcing of the manufacturing started, the country never witnessed current account surplus. In 2006, the current account deficit reached almost 7.7% of GDP or $850 million (Cecchetti, Mohanty and Zampolli 2011). Since that time, austerity measure by the US government has shown some positive impact, and the overall balance of payments has come down from 7.7% in 2006 to 5.5% in 2013. Still, the main concern is that apart from the service sector earnings, all the other sectors have contributed to current account deficit.
Figure: Debt as Perentage of GDP (Cecchetti, Mohanty and Zampolli 2011)
The US debt has been at a high level since the last 10-15 years. Last time before this decade, the debt was at such high level was in the 1950s. Since then the debt/GDP ratio went down to as low as 30% of GDP during 1978-1980. Since the senior Bush administration, the debt is always rising. Because of constant current account deficit for the last 20-30 years, the government’s ability to repay its debt and pay the federal employees is reducing (Cecchetti, Mohanty and Zampolli 2011). To cover up for that, the US government is borrowing more money. Debt is now at a level that can create a huge issue anytime disrupting the functioning of the government, and if that happens, then the economy will see a huge decline once again.
Cecchetti, Stephen G., Mohanty, M.S. and Zampolli, Fabrizio. "The future of public debt: prospects and implications". Bank for International Settlements. 2010. Web. 28 Feb. 2015 <http://www.bis.org/publ/work300.pdf>
Kenworthy, Lane and Smeeding, Timothy. "Growing Inequalities and Their Impacts in the United States". GINI Country Report United States. 2013. Web. 28 Feb. 2015 <http://gini-research.org/system/uploads/443/original/US.pdf?1370077377>
Egan, Matt. "When will companies stop hoarding cash?". CNN Money. 16 Oct 2014. Web. 28 Feb. 2015 <http://money.cnn.com/2014/10/16/investing/companies-hoarding-cash-us-economy/>
Albouy, David. "Are Big Cities Bad Places to Live? Estimating Quality of Life across Metropolitan Areas". University of Michigan. 29 May 2012. Web. 28 Feb. 2015 <http://davidalbouy.net/improvingqol.pdf>
McCully, Clinton P., Moyer, Brian C. and Stewart, Kenneth J. "A Reconciliation between the Consumer Price Index and the Personal Consumption Expenditures Price Index". Bureau of Economic Analysis. 2007. Web. 28 Feb. 2015 <http://www.bea.gov/papers/pdf/cpi_pce.pdf>
Bohn, Henning. "The Economic Consequences Of Rising U.S. Government Debt: Privileges At Risk". finanzarchiv 67(3). 282-302. 2011. Web. 28 Feb. 2015 <http://www.econ.ucsb.edu/~bohn/papers/BohnDebtConsequences.pdf>
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