THE PROCESS:

Understanding the Cycle of Inflation Federal Reserve’s Minimum Healthy Inflation and People’s Inflation Expectations

“The Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s mandate for maximum employment and price stability.”

___ FEDERAL RESERVE, USA

Minimum Inflation has maximum advantages for economy. It keeps the prices reasonably stable with only 2% of average increase in a year. It also means that the purchasing power of consumers does not lag behind the prices nor the salaries. The wages and benefits cost of corporations can also stay reasonable since their is no extraordinary demand for pay increases.

When inflation goes to high, it begins the cycle of spiraling costs and prices; and people’s purchase power lags behind pay increases. Zero inflation on the other hand, means pay cuts or downsizing in corporations who did not do well in business.

High Inflation Expectations Among the Masses

People Keep Bear Prices Rise Too Sharply Month After Month. They Fear Prices Shooting Up Beyond Affordability In A Year.

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Consumer Behavior with High Inflation Expectations

Fear of Extreme Future Inflation Forces People to Make Big Purchases (High Demand) They Would Have Otherwise Put Off Till Next Year

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Labor Behavior with High Inflation Expectations

When Federal Reserve observes consistently extreme price hikes, high inflation expectations, and strong demand persisting, it keeps increasing interest rates in an attempt to halt the spiral of inflation. Ultimately, when prices become too high, demand slows down, forcing corporations to reduce prices to reboost sales.

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