Feb 21 2008

Inflation in the headlines!

I was checking out the Shanghai Daily’s macro-economics news page this morning and here’s the headlines to the three latest stories:

Inflation fears grow on price rise figures — Shanghai Daily – English Window to China News

German producer prices rose at the fastest annual pace in 13 months in January, underlining European Central Bank concern that inflation is accelerating.

Prices for goods from newsprint to plastics jumped 3.3 percent from the same month a year earlier, compared with 2.5 percent in December, the Federal Statistics Office in Wiesbaden said yesterday, Bloomberg News reported. Economists expected a 2.8- percent gain…

“Energy prices are clearly the main driver of inflation,” said Peter Meister, an economist and bond analyst at BHF Bank in Frankfurt. “While inflation should moderate in the coming months we don’t expect the rate to fall into the ECB’s comfort zone before year-end.”

US consumer prices sound inflation bells — Shanghai Daily – English Window to China News

Consumer prices in the United States rose more than forecast in January, signaling inflation may still be a threat.

The 0.4 percent increase in the cost of living matched the gain in December, the Labor Department said yesterday in Washington. Excluding food and energy, prices rose 0.3 percent, after a 0.2 percent climb a month earlier, leading the so-called core rate to the biggest increase since June 2006, Bloomberg News reported.

A jump in food and energy costs, rents and apparel prices led the index higher last month. The report underscores that Federal Reserve policy makers can’t set aside inflation concerns as they weigh more interest-rate cuts to prevent a recession.

Now inflation sends a chill over the country — Shanghai Daily – English Window to China News

China’s inflation rose to its highest level in more than 11 years in January after the worst snowstorms in five decades worsened food shortages, and analysts warn there might be sharper increases to come.

China’s consumer price index, the main gauge for inflation, climbed 7.1 percent last month, the fastest rate in more than 11 years, the National Bureau of Statistics said yesterday.

Economists said inflation may accelerate further over the next two months and trigger tighter controls.

The country’s worst snowstorm in half a century fueled inflation as the snow disturbed supplies of coal, winter crops and related products like vegetables and edible oils.

Germany, the US and China are all struggling to deal with rising consumer prices. Interestingly, China and the US are in pretty much the opposite macroeconomic situation beyond the inflation problem. China’s economy has been overheating, growing at record rates for the last several months, indicating that the recent inflation is due to both strong aggregate demand and supply shocks caused by the snowstorms last month.

The US, however, is on the brink of a recession, during which prices often times fall as unemployment leads to falling incomes, which puts downwards pressure on aggregate demand. However, with energy and food prices soaring, along with the weak US dollar, Americans face the double threat of recession and inflation, putting the government and the Federal Reserve in a tricky situation.

Discussion Questions:

  1. According to the articles, which kind of inflation is each country predominantly experiencing, demand-pull or cost-push?
  2. Why do rising energy prices, which make up only a small proportion of consumers’ expenditures, result in inflation across the entire economy?
  3. Why does the double threat of recession and inflation in the US make it difficult for the Fed to continue cutting interest rates?

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

17 responses so far

17 Responses to “Inflation in the headlines!”

  1. Angel Liuon 22 Feb 2008 at 10:47 pm

    German & US are experiencing cost push inflation due to the increase in fuel and input resources. On the other hand, China's inflation is demand-pull because consumers are fighting over the limited supply of foods.

    Energy is the fundamental resource in the supply side of the economy. Every capital–machinery, vehicles, needs either electricity, oil, or natural gas to run. Therefore, when energy prices increase, a manufacturer's per unit production cost increase, shifting its aggregate supply curve to the left. Also, it rises the prive level.

    In the US, if the Federal Reserve continue cutting interest rates, it will lead to higher inflation. When unemployment climbs, Americans will not be able to afford basic comodities like foods for their family.

  2. Helenon 23 Feb 2008 at 10:51 pm

    Germany and the US are experiencing cost-push inflation, with the increases in energy and food prices as the main drivers behind the inflation. China, on the other hand, is experiencing a demand-pull inflation, the gap between aggregate demand and aggregate supply is widened even more by the snowstorm.

    The multiplier effect causes the increase in energy prices to affect the entire economy in the form of inflation. Energy is required in the manufacturing and transportation process of almost every product; therefore, the prices of almost all products have to be bumped up to accommodate to the increase in costs, which then generates an overall increase in the price level.

    If the US keep cutting interest rates, it may relieve the recession by stimulating more consumption and investment, but if aggregate demand grows so strong that aggregate supply cannot keep up, the US will not only have to deal with cost-push inflation, but also demand-pull inflation.

  3. Jackon 24 Feb 2008 at 4:37 pm

    US and Germany's economies are going through inflation because of the increase in costs of energy and food. On the other hand, China's inflation is caused by demand because everyone wants to buy the products that were disturbed by the snow storm.

    Although the direct consumption of energy by consumers isn't very much, energy is the ultimate resource for producing other goods. So when the prices of energy goes up, it brings the prices of all goods up as well.

  4. judychenon 24 Feb 2008 at 7:06 pm

    US and Germany is experiencing cost- push as the price of energy and food are increasing. Whereas China is experiencing demand- pull inflation after the snowstorm, the demand for food is high while the supply is low.

    Rising energy prices results in inflation across the entire economy because energy is needed to produce anything. Therefore, the demand for energy is high and leads to an inflation.

    Because if Fed continue cutting interest rates, the consumption becomes higher so the price would be higher. Even though it makes recession better but it also causes demand- pull inflation since the aggregate demand becomes too high suddenly.

  5. andyxuon 24 Feb 2008 at 7:07 pm

    As mentioned in the textbook, it is difficult to determine whether inflation, in which China is currently experiencing, is of the demand-pull or cost-push type. For example, the recent snowstorm in southern China may seem like an indication of a supply shock or cost-push category of inflation in which food supplies are in severe shortage. But put it in another way, the demand for food has outpaced its supply. Is this a demand-pull inflation?

    Therefore, the economic principles we learn in this class are not completely applicable in practice.

  6. kevinyehon 26 Feb 2008 at 12:29 am

    It's really quite interesting how an increase in aggregate demand can cause inflation. I mean it's pretty obvious in the US and Germany's case, that when AS goes down theres going to be inflation. That's pretty common sense.

    But in China's case, the inflation looks pretty largely due to demand pull. I would think that a huge increase in AD would lead to less inflation, but if its not accompanied by an increase in AS, inflation could skyrocket like it is in China

  7. Margaret Liuon 26 Feb 2008 at 7:21 pm

    Germany and the US are experiencing cost-push inflation, while china is experiencing demand-pull AND cost-push. Hopefully china's booming economy can cover this double inflation.

    Energy is used for almost everything. Enough said.

    If the Fed continues to cut interest rates, inflation may increase to a level of demand beyond the amount that the US is able to supply.

  8. KatherineYangon 26 Feb 2008 at 8:04 pm

    The US is experiencing cost-push inflation, whereas China is experiencing demand-pull. Although China could also be experiencing cost-push though to a lesser extent than demand pull.

    Almost everything nowadays requires energy, therefore a rise in energy prices could easily lead to inflation.

    If the Federal Reserve cuts interest rates, then deman will increase and supply may not be able to keep up with the increases in demand.

  9. Christina Huon 26 Feb 2008 at 10:01 pm

    2) It's because energy underlies virtually everything in our society. Everything a person consumes- from food to socks to television – had to use energy in its production at one point or another. Even if energy wasn't used in the production itself, the transportation of the good would definitely need energy.

    The government can't keep cutting interest rates because, if they do, the money people get back will be worth less and less.

  10. optional.xuon 26 Feb 2008 at 11:23 pm

    The US is experiencing a cost-push inflation as China experiences a demand pull one.

    Rising energy costs are a determinant of supply as they are an input. Thus, as cost of production increases so will prices of goods and services resulting in inflation.

    If the Fed cuts interest rates, true consumers will have more money to spend but then they are only fueling the fire for inflation. People have more money, but prices, due to high energy costs, will skyrocket. People have to pay more for the same amount of goods and inflation soars.

  11. richardtuon 28 Feb 2008 at 12:02 pm

    Right now, China is experiencing demand pull inflation, the vast amount of consumers' demand are exceeding the current supply, therefore, pusing the price level up.

    On the other hannd, US and Germany are experiencing cost push inflation, becuase the per unit cost to produce a product is higher, therefore, reducing the supply to the market, which led to a increase in price level. These two are the essential inflation factors.

  12. Chan Min Parkon 28 Feb 2008 at 8:37 pm

    In Germany, it is cost-push inflation as we can see from "Energy prices are clearly the main driver of inflation." The costs are going up, the AS curve shifts to the left and price levels increase. Also in US "A jump in food and energy costs, rents and apparel prices." This is also na increase in costs and therefore input prices are going up. In China, the demand for supplies are increasing but there is not enough to go around. Therefore it is demand-pull inflation.

    An increase in energy means an increase in input prices and energy is used for almost all production. Therefore input prices are greatly rising and inflation is occuring.

    Cutting interest rates are done in order for more demand, as seen along the investment demand curve. However if inflation is occuring, lowering interest rates will not make it more profitable for firms to invest more. Therefore it is hard for the Fed to continue cutting interest rates.

  13. Jessica Ngon 28 Feb 2008 at 10:22 pm

    Europe is experiencing pretty much solely cost-push inflation as the rising energy prices lead to an increased per-unit cost of production, shifting the AS curve in.

    I think that China is experiencing both demand- pull and cost-push inflation. Aggregate demand is pushed out not only because of the expectations of future higher prices of the snow storm, but because of the generated wealth effect in China. At the same time, the snow storm causes the costs of maintenance and transportations to go up, thus bringing the prices up as well. The only difference is, because of that, the recession problem is not as serious in China.

  14. Claire Mon 29 Feb 2008 at 1:31 am

    They are experiencing cost-push inflation, which is caused by the increase in energy and food prices. Because energy is used on every type of machines or capitals to produce products. The government cannot cut taxes more because it would result to a recession.

  15. Howard Linon 29 Feb 2008 at 11:19 am

    2) because when price of energy rises, even though is only such a little protion of house holds' expenditure, is major cost for production. When cost rises for a company, the price at which they will sell the good also rises, causing an inflation in the whole economy.

  16. Dana Y.on 01 Mar 2008 at 8:48 pm

    As Peter Meister said, Germany is experiencing a cost push inflation as increase in energy prices drives up production and distribution costs on a wide variety of goods. Increased per unit production costs then lead to the AS curve to shift to the left. Moreover, United States is also experiencing a cost push inflation for similar reasons. However,China's inflation is hard to discriminate. Not only were supplies of coal reduced because of recent snowstorms, creating greater aggregate demand for such energy sources (demand pull inflation), but also because overall supply dwindled (cost push inflation). It is also interesting to point out that inflation has not only been occurring in those three countries, but internationally in the past few months. For example, the price of South Korea's staple emergency food, cup noodles, has increased just this week, raising a lot of complaints and controversy. Is this because of the impact of the US recession in a phenomenon called coupling? It is fascinating how everything in economics is interrelated.

  17. Jessicaon 02 Mar 2008 at 7:16 pm

    1. The US and Germany are both experiencing cost push inflation, as the prices are rising. On the other hand, China is experiencing demand pull inflation; it is a case where "too many people chase after too few goods."

    2. An increase in energy prices causes inflation throughout the nation because energy is required in the manufacturing process. Basically, the cost of production increases for all goods, which makes the prices rise and inflation occurs.

    3. With a lower interest rate, AD increases as well as investment. However, as AD increases, it may lead to demand-pull inflation because the demand is greater than the supply.