Inflation may cause lower standard of living in U.S.

By David Tomas

Economists worry a recent boom in energy prices partially caused by recent hurricanes could lower the country’s standard of living.

Inflation occurs when the prices of goods and services increase, but incomes do not increase at the same rate, said Carl Campbell, assistant chair of the economics department.

“From September 2004 to September 2005, prices increased 4.7 percent,” he said.

The real problems occur when necessary products such as food and gasoline become more expensive.

“When prices increase, given the [same] consumer budget, they can’t buy as much,” economics instructor Jeff Reynolds said. “Your bang for your buck is less.”

As with other economic variables, inflation does not affect everyone equally.

“It hits different people differently,” said economics professor Khan Mohabbat.

This will hurt lower and middle-income people much more severely, he said.

Financial supports such as student loans, car loans, mortgages and credit cards will likely have higher interest rates because of inflation. To control the rise in inflation, the Federal Reserve raises interest rates, Mohabbat said.

The Federal Reserve System, or Fed, ensures a healthy economy by manipulating the amount of money in circulation through bonds trading.

The primary goals of monetary policy are to control inflation and keep unemployment low, Reynolds said. The Fed increases interest rates so the cost of borrowing money will be higher, he said.

“They can accommodate growth by having interest rates [go] up, as they have 11 times since mid-2004 to contain inflation,” Reynolds said.

The Fed has been able to successfully control inflation so far, and a new chairman will be replacing Alan Greenspan.

Ben Bernanke has been appointed by President Bush to replace Greenspan, and Mohabbat said he is quite tough on inflation.

“He will continue to have a tight grip on the monetary policy so inflation will not get out of hand,” Mohabbat said.

Not all economists, however, are so optimistic.

An increase in interest rates will reduce investment in the economy and this will eventually lead to higher unemployment, Campbell said.