Inflation in a developed country or in a developing country is an inevitable menace. Some nations try to rein the vicious spiral by enforcing strict fiscal measures. Inflation in US has been relatively steady. Though, there have been occasional cases of erratic high inflation, US have maintained a steady inflation rate of 3% for the last 30 years. In India, inflation has escalated to 8% on 30.05.2008.
If we scrutinize the reason for inflation in recent US, we will see that increasing cost of business plays an imperative role. The reason for inflation in US being significantly low is that the people have relied too much on the stock market rumble of the 90s for the supply superfluous cash. US economy says that even 3% inflation has a momentous role to play. US economists say that after 30 years of 3% inflation, one million dollar will buy about $400,000, that means 3% of inflation has already devoured 60 % one million dollar. Though 3% inflation is considered to be manageable, rate of inflation will rise once again, when the majority of the US middle-class will get saturated with debt. This will create an impasse in the sense that it will stagnate the economy until some of the debt is paid.
The recent inflation in US has brought to focus one obvious factor- no stock- even a commodity stock is resistant to inflation. Though gold has managed to make a come back to deal with a price above $700/oz , oil-and- mining put a halt in its drop, resource stock are getting over-heated. This is the case especially with the precious metals like gold and heavy stocks. This calculated fall of dollars is likely to turn into a fiasco. If this is not controlled in time, it will adversely affect the economy. US economists fear that it will eventually take gold near $ 1000 and oil near $100. Gasoline prices have hit up to $3.8 a gallon and diesel price by 64% from a year ago.
Inflation, as Peter Schiff puts it, is America’s ‘greatest export’. The substantial increase in prices of domestic consumer goods is created by the growth in money supply. This is a direct effect of the artificial demand of inflation, which has put more dollars in the hands of the US consumers. In USA, there are two ways open to the US citizens to use up the excess dollars. One- to buy US financial assets and two- to exchange the dollars with commodities like gold or oil. If they exchange it, then it comes back once again to the economy without adding any extra value.
But in the end, let us concentrate on the fact whether low inflation has any effect on the mechanism of business. Though low inflation increases the chance that at some point, the business mechanism will generate deflation, the danger is not great. In fact, deflation and low inflation revolves round the same point somehow. All economists put their belief in the Fisher theory which states that if one can change the average trend rate of inflation and then wait long enough, nominal interest rates will adjust point-to point to the change in the rate of inflation and real rate of interest will return to equilibrium. There is no reason that we cannot rely on this theory since the failure of this theory (if it happens) will only cause a certain degree of wealth to be redistributed from creditors to debtors.