In the article, “Feeling the heat” from The Economist magazine, the author claims that the US government is driving the labor market to its absolute limits, which has attracted a considerable number of supporters and critics coming up with mixed opinions over this development. The author suggests that the American economy is soaring up, with the GDP increasing and unemployment remaining low. However, some critics warn that such shifts in the economy could signal deeper puzzles that would be fragile in terms of the inflation rate.
One of the areas raising eyebrows is the interest rates increments by the Federal Reserve since 2015. Such a move is likely to curtail demands and affects jobs in the US. Ultimately, such interest rates could lead to inflation that would affect peoples purchasing or spending power. While defending the move taken by the Federal Reserve, chairman, Jerome Powel opined that nobody knew what temperatures were perfect to the economy and it is upon policymakers to make correct guesses. Per se, employment level and inflation rates are determined by these shifts and underlying economic policies but there have been errors in rate setters since they do not understand where particular decisions would hit strongly due to the dynamic nature of economic forces.
Some critics argue that there are challenges in understanding the labor market due to the high number of Americans quitting jobs while only a few are interested in new hires. Whereas reports indicate that more people are being drawn towards the labor market, higher inflation rates are likely to be a hitch too many of American’s purchasing power. Given that the unemployment rate is reducing while inflation seems to have risen but to an insignificant level, sustenance of the current trends will augur well in terms of productivity, GDP and jobs for Americans.
With respect to the Phillips curve theory shown below, there is an inverse relationship between unemployment rates and inflation rates. As such, when the rate of unemployment decreases, inflation has to increase. Nonetheless, the relationship between the two is not linear. In the curve below, an economy would have 3% unemployment level at the expense of 6% rate of inflation or an increase in the level of unemployment by 5% would reduce inflation levels to 2%.
Also, there is a direct correlation between the Phillips curve and the aggregate demand. Increases in aggregate demands result in demand-pull inflation, which would show an upward movement in Phillip’s curve. Therefore, an increase in aggregate demand results to increases in price levels and GDP that reduces rates of unemployment while increasing inflation.
In the article, “feeling the heart,” what is evident is that reduction of the unemployment rate has been due to the increasing interest rates by the Federal Reserve. Consequently, inflation has risen, which critics suggest would damage the spending power of most of the Americans. Also, whereas the economy would likely improve in terms of productivity and GDP, many argue that pushing unemployment to the lowest through charging higher interest rates would overturn the whole trend and auger badly for the Americans. As such, the only best solution for the economy would be to maintain current trends.
When the number of people employed goes higher, the rate of unemployment goes down. However, prices for commodities increases since anyone can afford. This translates to an increase in the rate of inflation that at extreme levels can damage the economy.
