The Inverse Relation Between Inflation and Unemployment

The Inverse Relation Between Inflation and Unemployment

Ben Hulley

Embry-Riddle Aeronautical University

June 2, 2014

In May of 2014 the Associated Press released an article titled US Producer Prices Jump; Hint of Rising Inflation, which discusses the rise in prices that U.S. companies received for goods and services in April. The producer price index rose 0.6 percent from March to April and was led by higher profits for wholesalers and retailers along with higher food prices. What does this mean for the U.S. economy? The producer price index measures the selling prices of goods and services in the U.S. over a period of time and gives an average of the increase or decrease in prices of all U.S. products and services. This gives a measurement of price changes before they hit the consumers. Consumer price index may vary from producer price index. According to the Associated Press article, the prices that producers in the U.S. received increased on average by 0.6 percent between March and April of 2014. This increase is part of a 2.1 percent increase over the last 12 months. U.S. producers have not seen an increase in prices this high in over two years. This is a sign that inflation is increasing. Many times inflation is seen as an evil aspect of an economy, but some would argue that a little inflation could be good for an ailing economy.

There are two different schools of thought on the causes of inflation. The first one is the Cost Push theory. The Cost Push theory states that inflation is caused by an increase in the cost of producing goods and services and the increase in cost is passed onto the consumer resulting in higher prices for goods and services. Increases in cost can be caused by taxes, higher wages, increased cost in raw materials, and natural disasters. The other school of thought is the Demand Pull theory, which says that inflation is caused by an influx of the quantity of money resulting in a higher demand and lower surplus of goods....