Economic Growth and Inflation

Economic growth and inflation go hand in hand. The Federal Reserve lowers interest rates to generate growth when there isn't enough and raises the interest rate when there is too much growth. Excessive growth leads to higher inflation, and runaway growth leads to runaway inflation, so growth has to be controlled.

The size of an economy is measured by the gross domestic product, GDP. How rich a country is can be measured by the GDP per capita, the GDP divided by the number of people in the country. As the population grows, if the GDP stays the same, the country is getting poorer. The goal is to have enough GDP growth to maintain itself or increase slowly to assure the country is at least maintaining it's wealth or slowly becoming richer. With a little thought one can easily see what illegal immigration does to the wealth of any country.

As GPD growth increases the first thing that happens is the Law of Supply and Demand comes into play. Growing the economy requires more materials be used to produce items that are being purchased in higher quantities. As some of these resource materials become scarce the price tends to increase. Think of buying fresh fruits or vegetables out of season, if enough people want them it's worth companies shipping them in from other parts of the world. As these material prices increase, inflation increases. If you haven't read the post Corporations Don't Pay Taxes it may be worth your time to read it, the post lays out how products are priced by manufacturing companies.

Part of the Law of Supply and Demand is greed, but part of it isn't. During slow economic times manufacturing plants will shut down production streams inside the factory that may be expensive to start back up. Before starting the production streams back up, the management will probably employ overtime on the existing streams to save the cost of putting the dormant streams back in production. This overtime will increase the costs of labor on the products being produced. Eventually management may make the decision to place the dormant streams back into production even though the costs to do so may be expensive. These factors drive up the cost of the products being made and generate more inflation.

Labor also works on the Law of Supply and Demand. If the economy continues it's growth and more and more products are needed, the company management may make the decision to build a new manufacturing stream which will require more workers. If unemployment is high it's not a problem to get these new workers at the existing wages. As more and more factories add more production streams the pool of available workers can be depleted. In one of my positions, during a period of low unemployment we found out that when unemployment reached 3.5% we started having trouble finding employees. At 3.0% unemployment, it was almost impossible. This proved to me that not everyone wants a job, everyone wants money but not everyone wants to work for it.

In times of low unemployment the workers know that they can find another job elsewhere easily so there could be a lot of turnover in the workplace. As people leave the company in a low unemployment environment, management has a difficult time replacing the employee which increases the costs of recruiting new workers. After they do replace them, there are training costs that must be incurred along with the lower productivity of the new employee versus the employee with more experience. To avoid these costs, management will make the decision to raise the pay of the existing workforce to keep them at their company. Wages for workers has been stagnant for way too long, finally we have enough economic growth that wages are starting to increase. While increased salaries are good for the workforce, the price of the product being manufactured will also increase to cover these costs causing more inflation.

Inflation is a natural part of economic growth. Controlled inflation is a good thing, it shows the economy is growing and young people entering the work force will have a job. A little inflation is worth the benefits we get from growing our national economy.