Most college macroeconomic textbooks have all sorts of information to explain the concept of inflation or recession. I was just explaining to son Leonard that an economy is in a constant state of change, and the Government attempts to keep some sense of control (sort of like lassoing a bull with a rope) using fiscal and monetary policies.
While I’m certainly not an esteemed economist such as Arthur Laffer or Adam Smith, all indications are the US economy is heading toward stagflation — i.e., a period of stagnant economic growth along with inflationary prices. There are at least three easily visible factors pointing this direction:
1. Raw materials: everyone knows that the price of gasoline has increased by more than 50% over the last year, but many don’t realize that the price of other raw materials such as steel, titanium, etc., have also seen price increases of nearly 100% over the last few years. This naturally affects the price of all capital goods, ranging from automobiles to airplanes.
2. Dollar exchange rate: the value of the US dollar versus currencies in other countries has changed substantially over the last year. For example, 1.00 US dollar used to buy 1.15 Canadian dollars. Today, the exchange rate is nearly 1:1. Thus, a US citizen buying goods from Canada has seen a price increase of roughly 15%.
3. Home values: for most US citizens, the value of their home is the majority of their net worth. Watching home values drop more than 20% over the last year — along with the drop in stock market values — consumers look at their monthly 401k and financial statements and feel poorer. The asset base to leverage for purchases is smaller now. This likely reduces the transactional activity in the consumer marketplace by a comparable amount.
These all provide evidence for a period of economic slowdown along with price increases.