(Tiểu luận) macroeconomics group assignmentinflation in the united states in 2021

Trang 5 B.CONTENTCHAPTER 1:Theoretical basis of inflationI.Definition- Inflation is the average increase in the price of goods in the economy over a certain period of time.. Moderate inf

FOREIGN TRADE UNIVERSITY

DEPARTMENT OF INTERNATIONAL ECONOMICS

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MACROECONOMICS GROUP ASSIGNMENT

INFLATION IN THE UNITED STATES IN 2021

LECTURER: Hoang Xuan Binh Ph.D

CLASS: KTEE203 K61.3 GROUP: 03

Hanoi, November 2022

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Lê Nguyễn Thảo Linh 2212250052

TABLE OF CONTENT

A INTRODUCTION 4

B CONTENT 5

CHAPTER 1: Theoretical basis of inflation 5

I Definition 5

II Classification of inflation 5

III General measurement 5

CHAPTER 2: The effects of inflation on the u.s economy 7

I Positive effects of inflation 7

II Negative effects 7

1 Higher cost of living: 7

2 Purchasing Power 12

3 Savings 13

4 Employment 16

REFERENCES: 19

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2022 must be an unforgettable year for the United States when its inflation rate is predicted to hit a 40-year high, the biggest 12-month gain since 1982 Being one

of the most powerful economies in the world, the U.S has a considerable impact

on the global economy, thus, U.S inflation, obviously, is inherently a sensitive issue at present A general view of U.S inflation in 2022 is crucially important for individuals and policymakers to make reasonable adjustments and decisions in general

The urgency of this trend let us choose “Inflation in the U.S in 2022” as the topic

of our assignment In this study, we will give some detailed information about inflation Besides, the effects of inflation on the U.S economy are deeply analyzed, and we will provide some recommendations for individuals’ decision-making and implementation of government policies

Due to limited knowledge and short implementation time, the inevitable gaps are sure things We all look forward to your comments

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B CONTENT CHAPTER 1: Theoretical basis of inflation

I Definition

- Inflation is the average increase in the price of goods in the economy over a certain period of time Accordingly, in a country, under normal conditions a unit ofmoney will buy a unit of goods When inflation occurs, that one unit of money can

no longer buy a unit of goods, but two or three more are needed

II Classification of inflation

a Moderate inflation (<10% per year)

- Moderate inflation, also known as mild or escalating inflation, is a situation when prices surge regularly over a certain period of time at a slow pace It increases consumer expectations that the price of goods and services will continue to rise, which will ultimately boost demand

- At this level, inflation does not affect the economy as well as people's daily lives

In other words, the economy is still functioning normally, with little risk and stability in people's lives

b Galloping inflation (10-99% per year)

- Galloping inflation, also known as jumping inflation, occurs when prices rise relatively quickly at a rate of 2 or 3 figures in a year

- At this point, the currency is severely devalued, the banking system does not work,which leads to the breakdown of financial markets and serious distortion in the economy

c Hyperinflation ( >100%)

Occurs when inflation spikes at a high rate, far exceeding galloping inflation, this type

of inflation manifests itself at a rate of 4-5 digits or more

This type of inflation seriously affects socio-economic life and economic activities fall into disarray, which is a disaster for the economy However, this happens rarely and to remedy the problem, the government should commit by exchanging money for the price of the currency

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I General measurement

To measure inflation, the general calculation formula is used as follows:

= x 100%

General price of the previous period

: General price of the study period

However, in practice, determining the general price is not possible So the following indicators were formulated:

a Consumer Price Index (CPI)

- Is an indicator in percentage terms to reflect the relative change in consumer pricesover time based on only one “basket” of goods representing the entire consumer goods

- This is the most commonly used indicator to measure price levels and the change

D =

c Producer Price Index (PPI)

- The producer price index in English is the Producer Price Index, abbreviated as PPI There are many ways to define the producer price index, as it is designed to reflect the average changes in the prices of all goods and services of producers at all stages of the process The producer price index is an indicator that measures 1

the general price level of intermediate and wholesale products

1 According to the Dictionary of Economics, National Economics University Press

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Kinh tế Vĩ

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INFLATION IN THE U.S IN 2022

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Mô 100% (9)

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CHAPTER 2: The effects of inflation on the u.s.

economy.

I Positive effects of inflation

Inflation does not always cause harm to the economy When the inflation rate is moderate, namely between 2-5% in developed countries and less than 10% in developing countries, it will bring a number of benefits to the economy as follows:

Stimulate consumption, borrowing, investment to reduce unemployment in society

Allow the government to stimulate investment in less priority areas through credit extension, helps to redistribute income and resources in society according to targetorientations and for a certain period of time selectively However, this is a uneasy and risky job that, if not proactive, will leave negative consequences

In general, inflation is directly proportional to the development of the economy High inflation definitely will cause a crisis, but on the contrary, if the country can maintain and regulate inflation, it will be a driving force for the economy to thrive

II Negative effects

1 Higher cost of living:

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Like many consumer goods, houses dramatically increased in price after the COVID-19pandemic emerged After recouping from the 2007-2009 Great Recession — when thehousing market plummeted — the annual increase in home prices hovered between 3%and 5% Once the pandemic hit, the yearly increase jumped into double digits — 12%between 2020 and 2021 and 15% between 2021 and 2022

Grocery and food prices:

Food price inflation is at its highest level in a decade A broad acceleration of food price inflation in the US has been underway since May 2020, around the beginning of the COVID lockdowns

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According to Yahoo!Finance, in September 2022, the price of food increased by 0.8% compared to August.

One of the biggest categories we saw jumps is in cereal and bakery products Now, this isconsidered the highest since the '70s late '70s and early '80s That was confirmed by

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Steve Reed, an economist at the Bureau of Labor Statistics If you take a look, cereal and bakery products being driven higher by 16.2% by, of course, Russia's Ukraine invasion that happened earlier this year Also, fruit and vegetables being impacted here, up 10.4% due to historic droughts facing the Western half of the country, impacting crop yields there.

As can be seen, higher prices across the board Robust consumer demand as economies pick up steam is driving protein prices higher, while labor shortages have restricted protein processor production As a result, some of the categories have a huge increase, which are flour, lettuce, potatoes, margarine, and milk and eggs Egg price even up 30% although it decreased by 3% in the middle of the period Milk prices are up 15.2%, also due to higher feed costs

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Prices for transportation in 2022 are ~ 23,2% higher in 2022 versus 2021 (a $45 difference in value)

Between 2021 and 2022: Transportation experienced an average inflation rate of 23,2%

per year This rate of change indicates significant inflation In other words, transportation costing $20 in the year 2021 would cost $24.64 in 2022 for an equivalent purchase Compared to the overall inflation rate of 7.66% during this same period, inflation for transportation was significantly higher

In the year 2021: Pricing changed by 14.56%, which is below the average yearly change

for transportation during the 2021-2022 time period Compared to inflation for all items

in 2021 (4.70%), inflation for transportation was much higher

Healthcare:

According to the CMS Office of the Actuary, US healthcare spending reached $3.6trillion in 2018 Between 2018 and 2027, healthcare spending is projected to increase by 5.5% annually The expenditure on health has seen an increase from 18% to 18,2% in the period of 2021 and 2022 By then, national health spending is expected to reach almost

$6 trillion, when it is projected to represent 19.4% of gross domestic product in 2027

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According to the U.S Bureau of Labor Statistics, prices for apparel are 5.27% higher in

2022 versus 2021 (a $1.05 difference in value)

Between 2021 and 2022: Apparel experienced an average inflation rate of 5.27% per

year This rate of change indicates significant inflation In other words, apparel costing

$20 in the year 2021 would cost $21.05 in 2022 for an equivalent purchase Compared to the overall inflation rate of 7.66% during this same period, inflation for apparel was lower

In the year 2021: Pricing changed by 2.47%, which is below the average yearly change

for apparel during the 2021-2022 time period Compared to inflation for all items in 2021(4.70%), inflation for apparel was lower

2 Purchasing Power

Economists can track changes in purchasing power to better understand the impact of inflation on consumers' buying power In a sense, purchasing power and inflation are two sides of the same coin Purchasing power measures what a unit of currency can buy,

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while inflation measures rising prices It can weaken over time due to inflation

(Fernando, 2022) That's because rising prices effectively decrease the number of goods

or services you can buy To measure purchasing power in the traditional economic sense, you could compare the price of a good or service against a price index such as the Consumer Price Index (CPI)

This is inflation's primary and most pervasive effect An overall rise in prices over time

reduces the purchasing power of consumers, since a fixed amount of money will afford progressively less consumption Consumers lose purchasing power whether inflation is running at 2% or at 4%; they just lose it twice as fast at the higher rate Compoundingwould ensure that the overall price level would increase more than twice as much over the long run if long-run inflation were to double

*Reality statistics

Less purchasing power really hurts families that are already experiencing financialhardship In fact, a 2021 study from the University of Pennsylvania found that lower-income households had to spend about 7% more on goods and services last year compared to 2019 or 2020, while higher-income households had to spend 6% more

Personal spending in the US rose 0.4% month-over-month in August of 2022, beating market forecasts of a 0.2% gain Services spending increased, led by housing and utilities, transportation, and health care while consumption of goods declined, namely gasoline and other energy goods Gasoline prices dropped 11.8%

to $3.691 per gallon in August from July However, personal spending data for July was revised lower to show a 0.2% drop, compared to an initial reading of a 0.1% rise Consumption has been resilient in the first half of the year, but is showing signs of cooling, as the Fed monetary tightening continues, energy costs remain elevated and the inflation holds close to 40-year highs, weighing on consumers' affordability

3 Savings

*Overall:

According to data from the U.S Bureau of Economic Analysis, Americans are

now saving less than at any point since the Great Recession, indicating that

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money is indeed getting tight in many households that are feeling the sting of high prices for fuel, food and housing

sky-In April 2022, Americans saved just 4.4% of disposable personal income,

which is down from 12.6% in April 2021 and the lowest rate since September

2008, when the country was in the middle of the Great Recession

In September 2022, Americans saved just 3.1% of disposable personal income, which is down from 7.9% in September 2021 and the second lowest rate

since April 2008, when the country was in the middle of the Great Recession

As the following chart shows, the latest decline in the personal saving rate comes after an unusual surge in savings amid the Covid-19 pandemic, when several rounds of stimulus checks bolstered Americans’ earnings at a time when lockdowns or other restrictions limited spending opportunities

Americans are paying more and getting less as inflation hits home:

Despite a strong job market and near record-low unemployment, 37% of Americans say their personal finances have gotten worse in the last year, according to a new NPR/PBS Newshour/Marist poll That's an 8-point jump since

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February Twice as many people now say their economic situation has worsened as

say it has improved

Most blame the worst inflation the United States has seen in four decades Consumer prices across the board rose 8.3% in August from a year earlier Price increases in some areas were even steeper

In a recent report by Morgan Stanley, 62% of workers said they're saving less money due to the impact of inflation

Americans are cutting back to make ends meet:

The vast majority of respondents (80%) say they worry about rising inflation continuing to have a negative impact on the purchasing power of their income in the next six months, while 75% say they are worried the rising cost of living will affect their retirement plans More than three in four respondents (78%) said a guaranteed lifetime income option (such as an annuity) as part of their retirement

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strategy would ease concerns about inflation.

4 Employment

Overall

Economists have determined that there may be a relationship between inflation and unemployment, described as the Phillips Curve, in honor of economist A.W Phillips, who identified the relationship in 1958

In details

Inflation may be hitting new 40-year highs, but less than a quarter of U.S organizations say they are revising their salary budgets due to inflation—despite many workers asking for raises or other actions to cope with higher prices, according to a new survey

Consumer prices rose 7.9% in the 12 months that ended in February, according to data the Labor Department released last week At the end of the fourth quarter of

2021, the U.S employment cost index showed that compensation costs for civilianworkers increased 1% for the three-month period ending in December 2021, with wages and salaries increasing 4.5% last year

Thirty-nine percent of workers say they have seriously considered quitting their jobs in the past three months, the highest level since the survey began in 2019, and

up 6% from last November

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The BLS released data Tuesday showing that monthly inflation had picked up 0.1%, while annualized inflation had climbed 8.3% The data led markets to tank

as investors forecast that the Federal Reserve would maintain its aggressive monetary policy as it works to bring down inflation

As if the longer inflation stays high, the bigger the risk that inflation expectations move up, which then feeds back into wages and prices In that case, the Fed wouldneed to take stronger action to bring inflation down, raising interest rates and keeping them higher for a longer period This would lower growth further and lead

to higher unemployment

In a scenario wherein monetary or fiscal policies are adopted to lower

unemployment below the natural rate, the resultant increase in demand will encourage firms and producers to raise prices even faster

As inflation accelerates, workers may supply labor in the short term because of higher wages – leading to a decline in the unemployment rate However, over the long-term, when workers are fully aware of the loss of their purchasing power in

an inflationary environment, their willingness to supply labor diminishes and the unemployment rate rises to the natural rate However, wage inflation and general price inflation continue to rise

Therefore, over the long-term, higher inflation would not benefit the economy through a lower rate of unemployment By the same token, a lower rate of

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