Inflation and economic sentiment from a macroeconomic perspective
- Isabella Perez
- Jun 17, 2024
- 3 min read
Inflation is always waiting for you at the edge of New Year’s Eve, when the 1st of January suddenly, all the prices of the products and services you used to buy go up, and this can happen abruptly and subtly. And in both ways, inflation always becomes a problem for consumers, increasing poverty, and killing the middle class. Budgets cannot stretch any other increase in inflation; however, we continue to survive despite it, and it is encouraging to observe how our economy maintains itself resilient.
Macroeconomic studies have shown that inflation has been decreasing since June 2022. Neel Kashkari gives us hope when he says there should be nothing in the way of inflation to continue decreasing if that is what the Federal Open Market promised. But Jeremy Siegel gets us back down to earth, hitting us with the harsh but real truth, that if oil and gas prices continue to increase, mostly due to the lack of supply and increased demand in the market, then the consumers’ purchasing power will naturally decrease. Of course, every single company needs energy to offer its product or service to the public, and if that basic element’s price increases, then the price of almost all products will increase too. And just as the energy companies play a vital role in inflation, so do interest rates and federal spending. As interest rates increase, they can slow down inflation as they reduce how much people are spending on certain goods, and the same is true for its opposite. As well as irresponsible federal spending, which produces an unnecessary increase in taxes on certain services or commodities, and therefore increasing inflation in many markets. However, even though our society is facing these current issues, it is motivating to see how employment rates are still the same and consumers are generally spending as much as they used to. It is indeed motivating but most of all shocking to see our economy staying resilient in the face of inflation.
I have to say I am amazed a curious to investigate more about what Van Binsbergen said about how economic sentiment could be the main explanation for this resiliency. It is very similar to what we call in psychology a “self-fulfilling prophecy” and it happens when you believe in something so fervently, that you begin to adjust your actions to agree with your beliefs, unaware of it. According to Binsbergen, economic sentiment is people’s and companies’ attitudes toward our economy and macroeconomic factors such as inflation, interest rates, and employment rates. This sentiment is usually a greater predictor of economic activity than other methods, and it is amazing and encouraging to observe how if our economic sentiment is positive, then the economic activity will behave accordingly.
Long-time series of data are crucial for understanding macroeconomic factors such as economic sentiment, and many others concerning investors and companies. From such data recollected from years of studies, investors and shareholders of companies can understand which strategic moves to make whenever interest rates go up, inflations peak or decrease, there is economic growth or recession, and whenever fiscal or monetary policies are implemented. In the end, the existing inflation rate, its impact, and its potential future trajectory play a crucial role in shaping the prevailing interest rates and guiding investment tactics. It's exciting to understand these factors, and essential to consider them when devising financial strategies.
Key Terms
Macroeconomic factors: The big picture factors, also known as macroeconomic factors, play a significant role in shaping the overall financial health of an economy. These factors encompass a wide range of influences, including geopolitical events, environmental changes, and economic developments. Their impact extends beyond specific demographics, affecting the entire monetary stability of a country or region. Excitingly, these factors serve as vital indicators of growth or decline within an economy.
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