US inflation: measurement, current situation

The economy is under inflation understand the steady growth of prices for goods and services over a certain period of time. This leads to a drop in overall quality of life of citizens. Among the reasons for the rising prices is usually called the rise of the demand with a constant supply level, increasing production costs and the expansion of the money supply in circulation. However, there are exceptions. And one of them is US inflation, which remains quite low in recent years, despite an active monetary policy of the state.

Measurement and metrics

Inflation causes money to lose its purchasing power. Every month, people can afford less if their salary remains unchanged.

Inflation in the United States, as in other countries, is measured using special indexes. The level is actually equal to the percentage of their change. The fed seeks to maintain a two-percent inflation in the United States. It is believed that this level facilitates the efficient expansion of the economy, since consumers have an incentive to make purchases.

Inflation in the U.S. is determined by two factors. The consumer price index calculates the “Bureau of labor statistics" on a monthly basis. In its basket of products includes all the necessary goods and services, from food to education. The second indicator – the producer price index. It includes goods such as fuel, farm products (e.g. meat or grain), chemicals, metals.

In the United States distinguish between total and underlying inflation. The first differs from the second percentage increase in prices for food and energy.

Inflation is not only positive but also negative aspects. Among them, reduce the burden of public and private sector, holding the nominal interest rate is greater than zero and lower unemployment.

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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 highest since Oct 2014. The main reason was the growth of prices for housing and electricity. Prices for food are falling for the past two months. During the period from 1914 to the year 2016 average inflation rate in the United States was 3.29 %. The highest figure was recorded in June of 1920. Then the inflation rate was 23.7 percent.

Causes

• Increase in demand at a constant level of supply. This means that consumers want to buy more than you can provide by manufacturers. This situation may be related to such factors: expansionary fiscal policy (lower taxes or increase government spending to stimulate the economy), the devaluation of the currency, a more active monetary policy (increasing the money supply in circulation).
• Increase in production costs. The main factor of this type of inflation is wage growth. The role of costs of other means of production, except for oil, since the 1980s gradually reduced.
• Inflation in the US due to expectations of consumers. If people expect the price increase, the demand for goods and services will increase. So the fed sets inflation at 2 % per year. This reduces the role of consumer expectations as a factor.

Why US inflation is so low?

Logical is the fact that the increase in the quantity of money in circulation leads to a rise in the price level. However, if you look at the US economy, this rule is not always observed. The link between creation of reserves and increased demand in the United States exists, however, since 2010, the fed had the opportunity to directly influence long-term interest rates. Commercial banks have the right to establish additional reserves in the fed not only for the purpose of crediting of consumers, but also to receive a small but steady percent.