Essay about Inflation: a commitment matter

Submitted By merinely
Words: 1946
Pages: 8

Lowering inflation rate: a commitment matter

A high inflation rate can kill a country. The percentage increase in the price of goods and services within a period of time is known as inflation. For example, if the inflation rate is 2%, then a $1 candy will cost $1.02 in a year. Inflation affects each human being in one way or another. We can’t see inflation but we feel it. A dollar from 1950 is now worth only $0.12. With inflation taken into account, the movie Cleopatra that cost $44 million to make in 1963 would cost $300 million to make today. Historians cite runaway inflation as a major cause of ancient Rome’s fall. Keeping a low level of inflation is important for both developed and emerging economy countries. However, a high inflation rate in an emerging economy country could lengthen the process of it becoming a developed country. The Dominican Republic is considered to be a country with an emerging economy and although its inflation rate is not considered one of the highest, in order for it to advance to a developed country level its inflation rate should go down instead of going up. Government representatives of the Dominican Republic should develop new strategies to keep the downward trend of its inflation rate as it is starting to rise again.
When the balance between supply and demand are out of control, buyers change their spending habits as they meet the thresholds for buying and producers suffer being forced to reduce production. This could be readily tied to higher unemployment rates. Unemployment is never a good thing. Unemployment leads to a cycle that creates more unemployment. When people are unemployed there is no money to buy wants but needs. Under these circumstances, business are forced to reduce prices in order to make profits, however sometimes these profits are not enough to keep the same amount of employees or even to keep producing. This is when the unemployment stars producing more unemployment until something is done to stop the domino effect.
The effects of inflation can be also brutal for the elderly who are looking to retire on a fixed income. The dollars that they expect to retire with will be worth less and less as time goes on and inflation goes higher (“Inflation” In-Depth Financial Market Analysis). About this topic, Charles Freedman and Douglas Laxton, authors of one of the Working Papers of the International Monetary Fund, agree that inflation brings distributional consequences. In their words “At a 5% inflation, individuals who retire at age 60 with a nominal (unindexed) pension will lose half the value of their pensions by age 74 and three-quarters of the value of their pension by age 88.” They also concluded that individuals with a lower income rate will find it harder to protect themselves against the effects of inflation on their savings and perhaps on their incomes in comparison to those individuals with a higher income.
When people retire from working it will probably be either because they have worked for a long period of time for a specific company or because they are old enough to keep on working in some duties. When the elderly are finally at home and being useful for many years, it won’t be satisfactory for them to see how the money they are getting for their pension, worth less each time. As the money for the retired elderly would lose its value, they would not be allowed to buy the same amount of products they were used to. This is going to be reflected in business sales. As sales would decrease, production would do the same, as well as the amount of people working for those products. As it is noticeable, a 5% inflation rate would also bring as a consequence the domino effect mentioned before just that this time not only young unemployed would be suffering its consequences, but also retired elderlies.
Going back to the 5% inflation rate issue, a national newspaper of the Dominican Republic…