Chapter 5

Article: http://www.nationalpost.com/news/slips+fears+fuel+inflation/4369383/story.html

Summary:

In summary, the article indicated is about current major North American markets and their reaction to the ongoing crisis in Libya and other oil-producing countries. In the situation right now, commodity prices have sky rocketed due to fear of the future. The price of gold has increased by US$21.30 an ounce and closed on Tuesday at US$1,431.20. Crude oil is also faced with an increase of price, rising US$2.66, making the price of one barrel averaging around US$99.63. Analyst, Colin Cieszynski is concerned about the “political turmoil and rising inflation could have a negative impact on the global economy”.

Connections:

The increase in prices of crude oil and gold is an example of inflation occurring. The specific type of inflation which this circumstance falls under is demand-pull inflation. The reasoning behind my conclusion of demand-pull was primarily due to the political turmoil situation going on right now. Investors are buying more gold and oil as a haven of investment, because in times of strife those commodities tend to increase, in return granting the investors, who bought those stocks and possibly bought them on margin, profit. With the modern marvels of media, the news concerning the turmoil in Libya is no well kept secret. As a result, all seasonal investors are informed and hastily invest in those commodities, and an increase of demand results in an increase of prices in those sectors. It is not an example of cost-push inflation, because there is no evidence that the oil supplies in Libya are draining out. If they were draining out, the manufacturing costs would increase and the following inflation of oil would be cost-push inflation.

Reflection:

As an economic indicator, inflation is probably not the best one available. Too much of inflation is determined by a psychological factor, whether it be fear of the future or the mind of an investor. Like the article cited, the increase of gold and oil on the Toronto Stock Market indicates that inflation has occurred, but the inflation does not necessarily mean that our economy is doing bad or good. It was purely based on the investor’s mindset to buy gold as a haven for times of turmoil. Inflation is more of a cause of economic hardship, rather than a precision indicator of it.