Defining inflation and unemployment
Inflation refers to the rate at which the prices of goods and services are rising hence undermining the purchasing power (Cashell, 2004). A high inflation rate makes goods more unattainable to the poor. Inflation reduces the value of the local currency hence making goods and services more expensive to purchase. Unemployment on the other hand is a situation whereby people who are actively seeking employment cannot find a job. Both the inflation rate and unemployment rate show how healthy or unhealthy an economy is.
Inflation and its causes
Inflation and unemployment are economic circumstances that are caused by varied factors. As mentioned earlier high rate of inflation causes high standards of living. The main causes of inflation are demand-pull, cost-push, and monetary expansion (Cashell, 2004). Demand-pull is raising the cost of goods and services due to the rising demand for a product. If the demand for a certain product goes up, the seller takes the advantage of the high demand and increases the price of his or her commodities as shown below (Freeeconhelp.com: learning economics solved 2012).
Cost-push is the other factor that influences inflation. When a product is in low supply, the cost of that commodity will go up. The cost-push is influenced by such factors as the depletion of natural resources, taxation, government policies, natural disasters to mention but a few. These factors affect the supply of particular goods and services hence causing their prices to escalate. The price rise, therefore, causes inflation as shown in the graph below (Freeeconhelp.com: learning economics solved 2012).
When financial institutions give loans at very low-interest rates, consumers make more borrowing. In such a situation therefore there will more money in the economy chasing to purchase very few commodities hence inflation. Without considering demand and supply, the price of almost every item is likely to go up due to the increase in money supply and high purchasing power.
Unemployment and its causes
Unemployment is caused by being fired, being laid off, or when an employee quits his or her job and goes looking for another one (Cashell, 2004). Unemployment, therefore, does not cover retired employees or persons who have left their jobs and are not looking for other jobs. Cashell (2004) asserts that people who leave their job to go back to school or leave to take care of the family are not in the category of the unemployed. He argues that a person who quits looking for employment is not qualified to be in the category of the unemployed (Cashell, 2004).
Unemployment can be caused by advancement in technology where employees are replaced with computers and robots or the need for new skills making employees irrelevant for the job. A decrease in consumer demand also causes unemployment since the business will lay off employees. With low demand, also making a profit becomes difficult and to cut costs businesses layoff their workforce. Below is a graph showing the rate of unemployment in the United States of America, The UK, Canada, and Australia (Cashell, 2004).
The relationship between inflation and unemployment is best described using the Philips curve as shown below (Cashell, 2004).
When the unemployment rate is high inflation is low while when unemployment is low, inflation goes high. This shows that the money supply is greatly involved in causing inflation. The unemployment rate determines the money supply through wages and salaries as well as access to loans and mortgages.
Below is a graph showing the rate of inflation in Australia, the United Kingdom, and the United States (Principal global indicators: consumer prices, 2012).
Performance in controlling inflation
In the graph above, Australia is the most consistent country of the three in dealing with inflation. This has been enhanced by the low levels of unemployed compared to the United States and the United Kingdom. The global economic recession had a greater impact on the two than it had on Australia. In America, thousands of people lost their jobs to the ailing economy and the same was the experience in the UK. Australia has adopted a monetary policy that keeps the employment rate in check. They have an expansionary monetary policy whenever unemployment rises to the full-employment level (Harris, 2012).
The United States and the UK on the other hand are poorly performing on handling inflation due to low-interest rates and monetary supply. One of the major ways the two countries ‘united states and the UK’ used to curb the recession was through reducing the reserve ratio. By reducing the reserve ratio, banks had enough money to lend out to the public at very attractive interest rates. The effect of this was that the supply of money was high.
Causes of inflation and unemployment in the three economies
As discussed earlier, increases in the money supply reduce the value of the currency and hence cause inflation. With the increased level of money supply, commodity prices escalated hence inflation. Again, the borrowing was so high that more investments were made hence job creation. This reduced the level of unemployment causing inflation. The money supply was further influenced by the United States federal decision to lower federal funds rates that allowed further lending to the public.
The United States had high levels of unemployment due to inflation. As the lending for mortgages was looming, the money supply was slowly building up in the economy and the threat of an economic recession was inevitable. The three countries experienced inflation and that led to the looming unemployment rate. In the UK the rate stands at 10% which is an all-time high.
At the height of the global recession, the UK was doing better than Australia but at least in 2008. However, the United Kingdom has had faced the worst unemployment rate, especially in the year 2011 (Harris, 2012). The United States comes in second after the United Kingdom and Austria third. All three economies were deeply affected by the global recession but their responses to it determined further hurt their economy. Unemployment in the US today is growing and the number of people losing their jobs is rising by the day.
Lack of skills for the market need is making people give up on looking for employment. High prices of raw materials and resources are pushing employers to lay off their employees to cut off on their hiring costs. Technological advancement in the current generation is also contributing to unemployment in the three economies. Computers and robots hence filling in the gaps that would probably be filled with people are replacing people.
Increasing the level of the money supply through economic recovery procedures such as lower federal funds rates has also influenced the rate of inflation and consequently causing an unpleasant unemployment rate. It is clear that while all other causes of inflation like demand and supply are true, the effect of the money supply is the main cause of inflation in an economy.
Cashell, B., W, 2004, ‘Inflation and Unemployment: What is the Connection?’ Congressional Research Service, vol.1, no. 12, pp.21-24.
Freeeconhelp.com: learning economics solved, 2012. Web.
Harris, T, 2012, Monetary Policy. How Recessions Work, vol.1, no.2, pp.1. Web.
Principal global indicators: consumer prices, 2012. Web.