http://www.vancouversun.com/business/Canada+consumers+incomes+keeping+with+debt+levels+study+finds/2754124/story.html
Summary:
Consumers are spending more than they can afford for their lifestyle. Their incomes cannot keep up with their spending. The assets being purchased are not appreciating in value as quickly as the debt many people owe. The consumer capability index measures a consumer’s ability to spend. The factors affecting this are debt-to-income and debt-to-asset ratios, real income growth, the long-term unemployment rate, house price to income ratio, personal savings rate, and personal bankruptcy rate. More money is spent than a consumer’s income can support. For example, a mortgage debt is 147 percent of a person’s income. Consumers are still continuing to spend with an income growth and the low interest rates. The low interest encourages people to borrow and spend which is what helps bring the economy out of a recession. Increasing interest rates would put people in the position to pay back debts and build up savings.
Connection:
The article explains how consumers are spending more than they can afford because of the low interest rates and increased incomes. The low interest encourages people to borrow and spend therefore it would make spending easier for consumers. As a result, more money is going into the economy and the price would increase drastically. This would result in the demand for products to increase. As the demand continues to increase due to consumer spending, the aggregate demand for goods and services would eventually exceed the supply. When this happens, this causes a demand-pull inflation. When the demand-pull inflation occurs, the prices of consumer products will increase in the Consumer Price Index. Households are spending more and as a result, businesses experience an increase in revenue. The increase in revenue will allow business to afford increased wages which means households are earning more money than before. However, the increased wages in the circular flow of money does not make up for the debts that they owe. These excessive spending would cause a problem in the future.
Reflection:
I do not believe the current situation with the demand-pull inflation is a good thing. Consumers are taking on too much debt in order to satisfy their spending habits. In the short run, consumers may be fine with the low interest. However, in the long run, it would be difficult for them to pay off the debts due to inflation rates increasing higher than wages. In the worst case scenario, if consumers are unable to pay off their debt, it would lead to a recession. It is important for the inflation rate to be controlled so that the economy can be more stable.
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I agree with you that if consumers continue to spend, demand-pull inflation would likely occur. When the demand exceeds the supply, the only way to decrease demand is to increase prices. This forces the interest rates to increase to help stabilize the inflation rate. This forces people to spend less because it becomes more expensive to borrow money. This is only one solution to solve this inflation problem. However, if the spending habits of consumers don’t change even though the interest rates increases, then inflation rates would keep rising. Therefore, the inflation rates depend solely on the spending behavior of consumers.
ReplyDeleteI agree that with the current situation, demand-pull inflation isn't a good thing. There are many consumers that spend more than they have to satisfy their needs and wants. With all these debts consumers are creating for themself, they end up being stuck in a hole for a long time due to interest rates being affected by inflation. As inflation increases, interest rates increase, therefore increasing debt owed by consumers. This creates a really big hassle for consumers as they have to pay a greater amount. Also, if inflation rates increase, this would draw potential consumers away from goods because of higher prices on goods, therefore decreasing demand and increasing supply. If spending habits from consumers don't change in the future, inflation rates would increase.
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