What is Causing Inflation Essay

Tags: stock market central bank monetary policy wall street federal reserve global economic crisis inflation business employees

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Between 1995 and 2005 the CPI for medical services rose from 224 to 329.2. This represents a 46.96% rise in the cost of medical services over a ten year period. In 2010, the cost of medical services was 393.5, a rise of 76.2% over a 15-year span. And in 2015, the cost of medical services was 452.89, a rise of 102.18% over a twenty year span.

Over the last five years, the cost of medical services has risen from 393.5 to 452.89, a rise of more than 15%. This represents a significant inflationary rise in costs of medical care. Neither my income nor anyone else’s that I know has kept pace with this level of inflation. The price of everything—not just medical care—seems to be rising; everything, that is, but wages.

A business manager, such as a human resources manager, might use CPI to obtain a good understanding of actual inflation of services, assets and commodities in the real world (a figure that is typically different from the Fed’s sense of inflation). By understanding how the prices of goods and services are increasing rapidly year over year, an HR manager may have a better sense of why employees are demanding higher pay. Keeping workers happy is part of the job of an HR manager, and pay rates are one of the most obvious ways to satisfy employees for their labor.

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The problem, of course, is that if businesses begin raising their workers’ pay, the fear is that the cost of everything will go up again.

Such a fear is not necessarily warranted however. The cost of everything (from the stock market to education to medical services to food to housing to precious metals) has skyrocketed in recent years because of loose monetary policy coming out of the Federal Reserve (Claeys & Darvas, 2015). This policy became so loose following the Global Economic Crisis of 2008 that the Fed kept interest rates low (which punishes savers), started buying Treasury bills hand over fist (like the rest of the world’s central banks—with the ECB even dipping into corporate bonds) in order to keep the market propped up and rates low, and all that new money worked to dilute the value of the Notes already in circulation so that the purchasing power of dollar was essentially cut in half thanks to the federal government’s and the Federal Reserve’s belief that….....

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References

Cheng, I. H., Raina, S., & Xiong, W. (2014). Wall Street and the housing bubble. American Economic Review, 104(9), 2797-2829.

Claeys, G., & Darvas, Z. M. (2015). The financial stability risks of ultra-loose monetary policy (No. 2015/03). Bruegel Policy Contribution.

Gabaix, X., & Landier, A. (2008). Why has CEO pay increased so much?  The Quarterly Journal of Economics, 123(1), 49-100.

Oet, M. V., & Lyytinen, K. (2017). Does Financial Stability Matter to the Fed in Setting US Monetary Policy?  Review of Finance, 21(1), 389-432.

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