Inflation Evaluation

This essay Inflation Evaluation has a total of 2997 words and 13 pages.


Inflation Evaluation
Today it is almost impossible to pick up a financial journal without seeing news
on the bull market that some consider to be overvalued. Overvalued or fairly
valued, only the future will show the truth. Either way, this market is one that
has shown greater run ups and returns, than any other market in history.
(Reference Appendix #1a) Recently the Dow Jones Industrial Average has reached
historical highs and then receded back to previous levels, leaving investors who
are used to consistent and record setting gains month after month, baffled. Both
the Dow Jones and the S & P 500 indices have seen modest and even flat
performances over the past three months. (Reference #1b) A recent article that
was published on the front page of the Wall Street Journal emphasized that
returns were flat due to the fact that investors were concerned of the possible
on set of inflation. If these concerns are warranted and inflation is thus
expected, the Bull market may very well be over. This after all makes sense,
inflation has slowed and stopped many run-ups in the past, and the onset of
inflation now could very well do the same. While the article introduced some
possibilities, it said nothing of the likelihood, the causes of, the Fed.\'s
reactions to, and the probability of expected inflationary increases in the
future. This paper is thus dedicated to expanding on these ideas by exploring
the rationality of these concerns by examining the circumstances surrounding
inflation. It is my speculation that the Bull market may eventually correct
itself in the future, but not in the short term due to immediate inflation. That
is, that the market was in fact flat due investors concerns, but actual
imperative inflation does not look to be expected in the near future. In order
to begin to understand the nature of market trends and forces, one must first
consider the current state of the U.S. economy relative to its\' business cycle.

Certain aggregates can be measured that tell us a great deal about this. These
aggregates have a strong history of leading, coinciding, or lagging the relative
business cycle with a high amount of regular correlation. Appendix 2a contains
illustrations, which show graphically the trends of the leading, lagging, and
coincident indicators over the past few years. These graphs are composites of
each group, and upon examination it is clear that all the indicators are rising.

In fact the composite index of leading indicators shows that they have not
experienced a significant downturn since the early 1980\'s, and have been
increasing rather sharply over the past 3 years. The fact that all of these
indicators are currently rising indicate that the economy is in a period of
robust growth, or an expansionary phase. The fruits of this expansion have
proven to be many, however it is often said that too much of a good thing can be
bad. In this regard there are factors associated with the degree and nature of
this economy, which could cause slowdown. For example, how is inflation
measured, and to what degree should we be concerned with the effects and
attributes of cost- push and demand- pull sources of inflation in this robust
economy? According the Baye and Jansen, inflation can be measured by considering
the growth of the money supply, the growth of M velocity, and the growth of real
output. Algebraically this is represented by the equation: inflation = (gm + gv)
- gy. This equation thus considers the monetary, supply-push, and demand-pull
factors. When the rate of inflation is measured in this way one can see, that
over the last few years inflation has been relatively stable about its\' trend.

This is in part, a result of the steady growth of GDP over the same period, and
is testimony to the success of the Federal Reserve Board\'s monetary and fiscal
policies. The rates of inflation over the last 10 years are graphically
illustrated in Appendix 3A. Cost-push inflation incurs when the prices of inputs
for production increase and thus cause profit margins to diminish. If firms are
unwilling or unable to accept the declination in operating income, they will
pass these increases on to consumers in the form of increased prices. In a
competitive market it would seem that firms would be unable to raise prices,
unless there was uniform pressure affecting the aggregate whole of suppliers.
(Examples include per unit costs of production, labor costs, energy prices,
etc..) Both the dollar cost per person per hour, and the output per person have
been increasing since 1997. These increases are most likely in response to
technological advances

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Topics Related to Inflation Evaluation

Economy, Macroeconomics, Economics, Inflation, Monetary policy, Money supply, Macroeconomic model, Real versus nominal value, Real gross domestic product, Interest rate, Real wages, Federal Open Market Committee

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