Rapid Growth and the Economy

For the past months the stock market has been engulfed with inflationary concerns. These concerns have come about due to high growth rates, strong labor markets, and apparently high rates of price growth in products.

Long term growth is usually attributed to population growth, growth of capital stock and technological innovations. Technology has been the mark of the 1990's bull market. The uses of the computer and Internet have lead to a more effective workplace. These uses have helped increase productivity to an all time high. Economic theory states that as productivity increases at some point products will be in short supply, resulting in inflation. Some economists point out that even though productivity has been growing at unusually high rates so has the ability of producing capital goods; thus preventing inflation.

Another factor causing recent worries has been the strong labor market. Price stability has rarely been compatible with high unemployment and rising wages. The reason for this is that high levels of unemployment causes wage pressures, as wages rise companies are usually forced to increase the price of their products to make a profit. This effect can be upset by high productivity, which is currently present in our economy. If a company has rising productivity, their income will generally follow. This rise in income can make up for the cost involved with climbing wages; hence the increase in the price of their products becomes needless.

The "high" levels of commodities, or consumer products, have induced additional worries. The price of commodities is the main indicator of inflation. If inflation is present in a country's economy, the price of commodities (things you might buy at a supermarket) will rise. Even though the Consumer Price Index ( index which measures the growth in prices of consumer products) has been climbing recently, some economists have argued that the increase has been isolated to oil and its products.

Although economic factors can be analyzed in numerous ways, the point of view described above may indicate that recent worries are unnecessary. It is important to point out that these arguments above would undermine the policies Federal Reserve Chairman Alan Greenspan has enacted. I thought these observations were worth pointing out though.