Talking Inflation With Dr. Marc Miller
Author: News Bureau
Posted: Wednesday, August 17, 2022 12:00 AM
Categories:
Pressroom | School of Business | Faculty/Staff
Macon, GA
Concerned about inflation? Who isn’t? We asked Dr. Marc Miller, MGA’s new dean of the School of Business, to answer a few questions about inflation, beginning with … what exactly is it?
What exactly is inflation and what causes it?
Inflation is an economist’s term for higher prices. There are always price increases at any point in economic cycles, but what makes it different is that these are sustained price increases over period of time and across many different products or services.
Inflation can be measured in a number of ways, but the most common measures is the Consumer Price Index for Urban Consumers (CPI-U) produced by the Bureau of Labor Statistics. The CPI tracks price changes in a sample of products that most consumers will purchase each month. The CPI measures prices in four categories; food, energy, commodities, and services.
Inflation does happen and is a natural occurrence. Where it becomes a problem is when prices increase at a rate that is higher than normal expectations. The Federal Reserve Bank has a mandate to keep the economy relatively stable and maximizing employment. The “Fed” attempts to manage inflation through adjusting interest rates which adds or subtracts money from the overall money supply. When interest rates are rising, the economic activity is dampened and thus people spend less which causes prices to decrease. When interest rates are falling, people tend to spend more and thus causes prices to increase.
For example, if you lived in a small town and all at once everyone in this town received a check for $1,000. They would all like to buy a new washer and dryer; however the stores only have enough washer and dryers to meet the demand for half of the residents. Thus, the people who really want it will bid up the price to get the scarce commodity. When supply is low and demand is high, prices go up.
Most economists believe that there are two major reasons for inflation: demand-pull inflation and cost pull inflation. Demand-pull inflation occurs when consumers have a lot of money to spend and they do! Cost-pull inflation occurs when supply decreases and thus sellers raise prices for consumers.
Demand-pull inflation is generally believed to be the most common cause for rising prices in the current inflationary periods. When our economy was largely shut down due to the global pandemic, governments reacted by giving people economic stimulus checks which resulted in a significant increase in the overall amount of money available for consumers to purchase goods and services. However, the producers could not keep up with supply as people could not go to work because of pandemic issues. Hence, demand for many products started going up, but production was dampened significantly; hence supply for goods was low which resulted in rising prices.
Is current inflation just an issue in the U.S.?
No, as the world’s economy is tightly integrated, the supply of goods and services have been globally affected by the global pandemic. In most of the developed world, inflation rates are hovering just below 10 percent. Asian economies have had lower inflation rates as they were able to contain infections with local lock downs and border closings, but many economists believe that this will catch up and high shipping costs will cause prices to increase in Asia and the Pacific Rim.
Inflation tends impact what industries and sectors the most?
When prices go up, demand for discretionary goods falter. Thus, non-essentials such as a high-priced cars, jewelry, hotels, vacations, and air travel all will show the signs of decreased demand first in inflationary times. But overall, inflation will affect all sectors fairly equally as consumers are not able to make their income meet their needs. Therefore, consumers have to start making trade-offs and choices.
What are the most noticeable impacts of inflation on average citizens?
Everything is more expensive! Gas is higher, groceries are higher, computers, cars, everything that you spend money on costs more. Thus, even though you may have a nice salary, if the price of everything you purchased has gone up, then the purchasing power of your salary is lower. Therefore, you either look for another job which pays more or you simply don’t spend money in hopes that prices will go down in the future.
What can be done to end or tamp down inflation?
The way to lower inflation rates is to lower demand. Therefore, governments will attempt to divert your ability to purchase by lowering the amount of money that you have to spend through three ways: higher taxes, lower government spending, and higher interest rates.
If you have to pay more in taxes, you have less that you can spend and thus demand goes down and supply levels stabilize and then prices will start to lower. If the government decreases spending, then supply levels go up and demand goes down which decreases prices. By increasing interest rates, you have less to spend and thus, supply levels stabilize and along with it prices. In addition, government can encourage more saving as opposed to spending by improving tax savings for retirement savings or other targeted savings programs.
However, the trick is to not slow down the economy so much that it triggers a recession. You want to “cool it off” as opposed to stopping it dead in its tracks. If we knew exactly how to do that, then we would not be in near double-digit inflationary periods.
Dr. Marc D. Miller joined MGA as dean of the School of Business in July 2022. His most recent previous position was at Henderson State University in Arkadelphia, Ark., where he was also School of Business dean. MGA represented a return for Miller to the University System of Georgia (USG). Prior to his most recent position, Miller was dean of the Hull College of Business at Augusta University. Miller is an award-winning researcher in the areas of information systems, distance education, and innovation management. He earned his doctorate in Information Systems Management from Auburn University and his bachelor’s and master’s degrees in Business Administration from what is now Augusta University. He recently completed a graduate certificate from Louisiana State University in Education Technology.
Sources:
U.S. Bureau of Labor and Statistics (https://www.bls.gov/bls/inflation.htm)
Wikipedia on Inflation (https://en.wikipedia.org/wiki/Inflation)
Freakonomics (https://freakonomics.com/)