Inflation and Business

Inflation

A general rise in the prices of goods and services over time is the process of inflation.  Inflation is a balance between the availability of money, goods, and services.  An imbalance of the money supply and goods or services can cause higher inflation.  Inflation matters to businesses because they need to react to the changing dollar value in valuing the price of their goods.  Consumer Price Index is a monthly statistic that is published to measure the pace of inflation or deflation.  Businesses have to determine if the price of items match the demand.  Additionally, businesses have to decide whether a change in inflation warrants a price change.

Money Supply

If the supply of money in an economy increases while the amount of goods and services remains around the same; prices would increase as consumers buy more.  As businesses see that suppliers require more money for items or as customers show higher demands; businesses will increase the cost of their items if their supply experience more demand.  Money Supply requires steady control through monetary polices to grow the economy and avoid or curtail inflation.  There are 12 Federal Reserve banks which hold extensive control over the money supply.  Reserve Requirements control how a minimum amount banks must keep in reserve and they can be increased to reduce the money supply, or decreased to increase the money supply.  The Federal Reserve can increase money in the economy when buying bonds, and can take money from the economy when they sell bonds.  Managing Discount Rate influences how much banks borrow from the Fed, so rate increases increases the cost on loans to bank, discouraging banks bringing money into supply, whereas rate increases encourages lending and bringing money into the supply.

Purchasing Power

Another term associated with inflation, is Purchasing Power.  Purchasing power is the comparison of value between two different currencies and helps balance the money supplies and inflation rates of different countries.  Purchasing Power Parity helps balance the inflation and value of how many goods or services a currency can buy in a foreign market.  Money Supply and Purchasing Power share a cause and effect relationship.  Changes in the Money Supply can directly impact Purchasing Power.  Purchasing Power also has a cause and effect relationship with inflation, but is also impacted by other factors.  Currency Exchange rates can influence the purchasing power of one currency versus another, and can be different in each country.

Case Study

Housing Bubble Burst

The Federal Reserve decreased interest rates and took too long to increase them.  This increased the ability for entities to increase the money supply.  Along with the Congress promotion of loans, the banks made loans and created securities based around mortgages.  Regulatory agencies were deceptive or negligent in their analysis of the loans and securities.  Consumers in a majority began to borrow due to low interest rates without the ability to repay.  This eventually led to the burst of the housing bubble, where property values were much lower than the mortgages that were owed on them.  Inflation occurred here as The Fed’s monetary policy was to increase the money supply which increased inflation.

Current Gold and Silver Prices and Precious Metal Retailers

The interest rates have seen three increases the past few financial quarters.  This is hoping to take money out of the money supply.  This impact is being seen today as the price of gold drops below $1200 an ounce, and $16 an ounce for silver.  Although the rates of precious metals have decreased below the $16 and $1200 rates.  The purchasing power of the has increased, so the United States Dollar can purchase should purchase more Gold or silver ; prices have not changed.  This is most likely because the retailers may feel the increased dollar value will be temporary.  Additionally, retailers may keep prices constant as the value of the dollar increases, if demand remains consistent.

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