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Inflation Inflation = a general increase in prices o Affects purchasing power of money The Inflation Rate o The percentage rate of change in price level over time Price Indexes o Measure how much prices change over time o Consumer Price Index (CPI) is most common o Current prices are compared to the CPI of a base year (base year always 100) ex: If CPI in 2010 was 200- what’s the % increase between the base year(1983) and 2010? Types of Inflation o Creeping inflation o Chronic inflation o Hyperinflation Theories on Inflation’s Causes o Quantity Theory o Demand Pull Theory o Cost-Push Theory Effects of Inflation o Erosion of purchasing power o Erosion of income especially if on Fixed income Deflation o Sustained drop in price level