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The Annual Inflation Rate Just about everything we do as a nation lends to the annual inflation rate In this article though I have chosen four of the most important variables that influence inflation the most Inflation is the sustained increase in prices or in other words a steady decline in the buying power of the dollar I have come up with an equation that includes the following variables the unemployment rate the federal funds interest rate per capita income and new home sales These variables consistently have shown a relationship to the inflation rate and aggregately may help to explain the cause of inflation The first variable I chose was the unemployment rate This is the annual average of persons 15 years of age or older actively seeking and available for work but unemployed BLS The relationship between unemployment and inflation provides evidence of a short-run trade-off between the two variables known as the short-run Phillips curve BLS The relationship suggests that by accepting higher inflation levels the Fed can use monetary policy to stimulate the economy and temporarily reduce unemployment When prices go up the wages are affected also This occurs because if no adjustments are made then the same wages will buy less goods and services which affects consumer spending Less spending means less profits which ends in layoffs and higher unemployment The flip side reveals the effect of unemployment on inflation The hypothesis for this variable is that as the unemployment rate decreases the annual inflation rate will increase The reasoning here is that if more people are employed and have money there is more spending more demand and therefore prices will rise The second variable I chose was the federal funds interest rate Federal funds are the Feds channel of affecting the economy through the banks The Fed aims to maintain a steady economy with steady growth and stable prices Too much money results in price increases or
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