Download Inflation

Inflation
• A general increase in the price level.
• A decline in the value of money.
• “Too many dollars chasing too few goods.”
Types of Inflation
• Demand Pull
– Resources are fully employed
– Businesses cannot respond to new demand by
expanding output
– Excess demand bids up the prices of the limited
output
– Total spending pulls up prices
– “too much money chasing too few goods”
– Can be persistent
Types of Inflation
• Cost Push
–
–
–
–
–
–
–
(supply side)
Rising per unit production cost
Firms willing/able to supply less at price
Supply shocks
Rising cost of Factors of Production pushes up prices
Wage – Price Spiral
Symptom of something gone wrong
Self-limiting – causes recessions
Types of Inflation
Hyper-Inflation
Very high rate of inflation.
• Money loses value very quickly.
• Money becomes worthless.
Causes
Currency is printed to pay government obligations / debts.
• Germany between WWI & WWII
(322% per month in 1922-23)
Zimbabwe
inflation hits
11,200,000
percent
.cnn August 19, 2008
• Zimbabwe's inflation rate
has soared in the past three
months and is now at 11.2
million percent, the highest
in the world, according to the
country's Central Statistical
Office. Official figures dated
Monday show inflation has
surged from the rate of 2.2
million percent recorded in
May, despite the
government's price controls.
In February, the price of a
loaf of bread in the country
was less than 200,000
Zimbabwe dollars. On
Monday, that same loaf of
bread cost 1.6 trillion
Zimbabwe dollars
Zimbabwe's $100 billion banknote with the number of
eggs it could purchase on its release date.
Zimbabwe's $100 billion banknote with the number of eggs it could purchase on its release
The dollar was effectively abandoned as an official currency on 12
April 2009. Companies and individuals are permitted to transact
domestic business in other currencies, such as the US dollar or the
South African rand.
Country
Hungary
Zimbabwe
Yugoslavia
Germany
Greece
China
Month with
Highest
highest
monthly
inflation
inflation rate
rate
July 1946
MidNovember
2008 (latest
measurable)
January
1994
October
1923
November
1944
May 1949
1.30 x 1016%
Equival
ent
daily
inflatio
n rate
195%
Time
required for
prices to
double
15.6 hours
79,600,000,000
%
98.0%
24.7 hours
313,000,000%
64.6%
1.4 days
29,500%
20.9%
3.7 days
11,300%
17.1%
4.5 days
4,210%
13.4%
5.6 days
Deflation
•
•
•
•
A decline in the price level
Unusual in the U.S. economy
Happens during a severe contraction.
Significant declines in prices
– After the Great War 1921 -1922
– Great Depression 1927 – 1933 & 1938 - 1939
• Last time we had a yearly decline 2009
Measures of Inflation
• Price Indexes
– CPI = Consumer Price Index
– PPI = Producer Price Index
– GDP Deflator Price index
• Market basket
– Price of the good/service
– Weighted – frequency of purchase
• Index or base = 100
Measures of Inflation
Price Indexes
• Consumer Price Index
– Market basket of goods (95,000)
– Many retail establishments (23,000)
– Cities (87)
Education 6.4%
Other 3.5%
Food and Beverage 14.8%
Recreation 6.3%
Medical Care 6.6%
1
2
3
4
5
6
7
Transportation 17.3%
Apparel 3.6%
Housing 41.5%
8
Consumer Price Index
Inflation since Jan 2001
Last 50 years Inflation
Since 1914
Inflation & CPI
Year
Inflation
1
CPI
100
2
10%
110
3
10%
121
4
10%
133.1
October 2010 CPI – Selected Sectors
(1982-84 = 100, June 1983 = 100)
All items
226.421
Food & Beverages
Housing
230.885
220.138
Apparel
127.590
Transportation
Medical Care
212.127
403.430
Tuition
611.458
Tobacco
842.785
8.882
Info Tech (12/88 = 100)
October 2009 CPI – Selected Sectors
(1982-84 = 100, June 1983 = 100)
All items
216.177
Food & Beverages
Housing
217.957
216.612
Apparel
123.998
Transportation
Medical Care
185.362
378.552
Tuition
563.352
Tobacco
773.758
9.501
Info Tech (12/88 = 100)
October 2008 CPI – Selected Sectors
(1982-84 = 100, June 1983 = 100)
All items
216.573
Food & Beverages
Housing
218.705
217.383
Apparel
122.243
Transportation
Medical Care
192.709
365.746
Tuition
537.606
Tobacco
599.744
9.874
Personal Computers
Inflation redistributes income
• Key is real income
– The amount of goods and services money buys
• If your nominal income keeps pace with
inflation your real income doesn’t change
• If inflation is expected or anticipated can adjust
• COLA cost of living adjustment
Anticipated Inflation
• Inflation is not as serious IF we prepare for it
– IF we adjust nominal income to expect price increases
– IF lenders adjust nominal interest rate by charging an
“inflation premium”
Real Interest Rate
+ Inflation Premium (expected inflation)
= Nominal Interest Rate
Hurt by Unanticipated Inflation
• Fixed Income recipients
– Retired people on pensions
• Savers
– Interest rates often lower than inflation
• Creditors
– Repaid in dollars that are worth less
Helped by Unanticipated Inflation
• Flexible Income receivers
– COLAs
– Social Security – indexed to CPI
– Commission sales
• Debtors
– Lender factors in an inflation premium
– If inflation is higher than anticipated
Philips Curve
• Inflation and Unemployment are inversely related
• Trade-off for Policy Makers
– Fight Unemployment by increasing Inflation
– Fight Inflation by increasing Unemployment
Inflation
High Inflation
Low Unemployment
Low Inflation
High Unemployment
Unemployment
How has inflation affected the value of a dollar?
• Todays Dollar $1.00
• Purchases (is worth)
.442 of 1982-84 $
.147 of 1967 $