Over the past 21 months political parties have argued whether printing trillions of dollars of additional spending would create inflation. Back to the basics of economics, yes it does. Over the past two years inflation has moved from 1.4% to 8.3%. A decade ago it was at 1.6%. With significant inflation for energy, food, housing, and nearly all consumption in the U.S economy, the Federal Reserve and most economists (news media economist do not count) now see pressures on consumer prices as continuing over the next decade. To make conditions worse, prior annual mortgage rates of 2.0% now exceed 7.0. Government estimates see inflation as 8% per year or higher. And while the Federal Reserve had hoped the inflation rate would be reduced to 3.5% by the end of 2023, they also thought it would be reduced by several percent points from 8.2% by the end of September. Instead, it increased to 8.3%. There are two basic and effective ways to reduce inflation: 1) increase interest rates, and 2) decrease the money supply. The Federal Reserve plans additional increases interest rates, however the federal government also plans to continue additional spending through increases in the money supply. Unfortunately, wages normally lag the inflation rate, consumers need to plan for significant increases in pricing. Year to date wage increases have averaged about 4.0%…less than half of the inflation rate.
Required:
1) Created a realistic household budget for the year 2023. Take time to think about, and include all categories of cost such as food, energy, fuel, car, housing, taxes, travel, entertainment, retirement, household goods and clothing, and anything else. Some of these items may be temporary fixed cost over time, while others will be very inflation sensitive.
2) Run an analysis using the present value tools we teamed in this course…Create a budget for the year 2028 (five years from now) to examine the effects of inflation overtime. Prepare a comparative budget with four columns. The first column should be in nominal dollars (your current budget for 2023). The next three columns should be for a best (3.5% inflation per year if the federal govemment decreases spending), average (8.0% inflation per year if the federal government maintains current spending levels), and worst case (15% inflation per year if the federal government increases spending) inflation scenarios for the year 2028.
3) Discuss your comparative results. This discussion is well beyond just the numbers…what do these results mean? How will these results affect your life?
