What is Inflation ? Important Inflation Facts You Need to Know !!

Inflation and financial crisis

In 2022 United States of America struggles due to inflation. What is the reason behind it? How many months it will take to recover from these? How is it going to affect the global? Here we are going to look into the above questions in detail.

When we look into the US recessions since world war 2 we can identify two major things

1 GDP of the economy goes down

2 unemployment goes up

In 2022 GDP of the USA goes down but the head of the federal reserve said that recession is certainly a possibility. Later we have seen that the US inflation rate has risen to 7.5%. It was the highest rate of inflation since 1982.

United States OF America’s Inflation rate hits 40 Year high and consumers are more worried about the situation. House prices increased up to 6 %, grocery prices increased up to 13%, car prices more than 9 %  compared to last year, and gas prices also increased. This lead to consumers changing their buying habits. It could last for months.

Impact of Inflation on the US Economy

 

• Sudden economic shock – Currently US inflation rate hit the last 40 years of high. This is completely affected the US economy. House prices, grocery prices, car prices, and gas prices also increased.
• Growing debt defaults – The salary of the people remains the same but the value of goods and services increases this leads to a change in the value of money and it leads to debt defaults for many of them
• Stock market Bubbles-  the price of stocks eventually decreases. This shows the weakness in the market

How Inflation is going to affect the global?

If the United States of America is hit by Inflation definitely it will affect the global. Because the contribution of the US economy to the world is 30% of GDP. If the contribution of the US GDP  decreases global growth will shrink.

Most of the country’s stock market starts reflecting the US Stock exchange. Global markets will fall accordingly. It affects imports and exports and that leads to a currency fall against US Dollar. It shows high volatility in forex exchange rates.

How do you invest During inflation?

Invest in stocks that are fundamentally strong but have the lowest rate in recession time. These stocks definitely give a minimum of 10% – 20% returns in the future. If you invest in these times when the market comes out of inflation you can enjoy the high return from the market

Here we are going to learn some of the basics of Inflation including its definition. it also includes the reason behind it. how a country can manage the recession. what tools they are using to control inflation, and how these tools impact the country’s work. etc are going to understand from the below

What is Inflation?

In simple words, we can say it is a price rise in a commodity, when the inflation rate increases the value of the currency goes down. At the same time cost of living is getting higher. The price of goods and services increases because of huge demand. When the demand for a product or service increases but the supply is low then the customers are willing to pay high for the commodity or service, that will leads to increases in the rise of the price of a commodity or service.

What is the reason behind the decrease in supply?

There are many reasons to decrease the supply of a commodity or service

• Low availability of manpower resources
• Unavailability of raw material
• High production cost
• Lack of transportation etc

When the cost of a goods or service increases the will leads the consumers to go into savings mode. In simple words when the price of goods and services increases but your salary will be the same then the value of the currency is less, which leads the consumer to, reduce the spending or not spend on that and move into saving that money. The consumer will spend less money this will leads to affect the GDP.

How to control Inflation in a country?

There are two ways you can control the inflation rate of the country

1 Fiscal policy

2 Monetary policy

 

Fiscal policy: It is used by the Finance department of the government. In the United States Of America, it is controlled by The Department of the Treasury. Under the Fiscal policy, there are 2 main tools used by the government.

1 Taxes

2 Government Spending

the government will do some changes in the collection of tax. And the money collected is used for different purposes like education, defense, pension, and government employees’ salary. If inflation hit the country they will do some changes in these to control inflation.

Monetary policy: Coming to the monetary policy in the United States of America, monetary policy is controlled by the Federal reserve. They are using various tools like

• The Discount rate
• Open market operations
• Interest rates
• Reserve Requirements.
• Interest on Reserve Balances.
• Central Bank Liquidity Swaps
• Term Deposit Facility.
• Overnight Reverse Repurchase Agreement

The federal reserve uses these tools to control the money flow into the market. This is the main way that they control inflation. The United States Of America uses the above-mentioned tools to Control Inflation

How to control inflation using monetary policy?

The federal reserve uses to tighten monetary policy using

Increases the Interest rate:  if the interest rate is raised, that will discourage people to borrow money for business and other purposes. This will leads to loans becoming more expensive and people will refuse to borrow money from banks.

The people don’t want to spend more interest on loans so they will postpone their plans. A few examples are it includes housing loans, education loans, vehicle loans, etc.

This is indirectly the government reducing the supply of money in circulation. This leads to economic activities will be reduced and earnings will fall and the price of the commodity will drop.

Inflation and unemployment are connected. When inflation will be high, unemployment will be high. Compare to the last two years (2020 to 2022), Covid 19 pandemic hit all countries very badly most of the sectors go affected. Sectors like construction, automobile, and hospitality got affected badly many people lost their job.

Sectors like retails and health care perform well but for the overall growth of a country, all sector should perform well. Governments  should control inflation and maximize employment for that they should bring more policies