Download And the measurement of inflation

And the measurement of inflation

Definition =

Measured by the CPI (?? ?? ??)
- to measure inflation, subtract last year’s
price index from this year’s price index and
divide that number by last year’s price index,
then multiply by 100 to express as a
percentage


Click here!
Rate of Inflation =
(Price Index Y2 – Price Index Y1) x100
Price Index Y1
So for instance if the Price Index for 2012 was 207.3
and the Price Index for 2011 was 201.6, what is the
rate of inflation?
2.8%


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Really a “market basket” of 300+ consumer
goods and services which are purchased by a
typical “urban” consumer.
Last class we discussed the GDP price index.
What do you think was included in this
measurement of economic growth?
Let’s take a look at a CPI calculator which will
allow us to compare the prices of consumer
goods and services of various consumer
goods.
 CPI Calculator

Divide 70 by the percentage rate of inflation =
approximate number of years for the price
level to double

Ex: at 7% annual inflation = 10 years for prices
to double
Deflation (definition??) is as much of a potential
problem as inflation
• All nations experience inflation and/or deflation
• Some nations experiences astronomical rates of
inflation
•
EX: Zimbabwe’s rate of inflation in 2005 was 585%!!!
1.“Demand-pull” inflation
2.“Cost-push” inflation
•
•
Spending increases faster than production
“Too much money chasing too few goods”
•
•
•
•
Also known as “supply side” inflation
Prices rise because of a rise in per-unit production costs
• Or unit cost = total input costs/units of production
Output and employment decline while the price level is rising
Supply shocks have been a major source of cost-push inflation,
typically due to dramatic increases in the price of raw materials
or energy
• EX: Oil embargoes of the early 1970s caused cost-push
inflation
Nominal vs. real income
•
•
Nominal =
Real =
•Real income = nominal income ÷ CPI (in
hundredths)
•CPI used to deflate nominal income into
real income
If one can “anticipate” the rate of inflation, one can
take some steps to adjust for inflation to lessen its
effects
 If inflation is going to go up, you will buy goods and
services now rather than save money
 If inflation is going to go done, you will like save your
money and buy goods and services when prices go
down

However most inflation occurs
without most people “anticipating” it
correctly!

Real interest =

Nominal interest =


EX: New Home Mortgage
Nominal IR = 5%, Inflation = 1.5%, so Real IR = 3.5%
Workers participating in the labor and product
markets
1.
A. “Sticky Wages”
Fixed Income Receivers
A.People living on Social Security or fixed pension
payments
3. Savers
A.Savings loses its purchasing power
4. Creditors
A.Repayments worth less in purchasing power
2.
Flexible income receivers
A.Cost of living adjustments (COLAs) help to offset
inflation
2. Debtors
A.Paying back with “cheaper” dollars
1.
Many families are simultaneously helped and hurt by
inflation as they are borrowers as well as earners and
savers
A.
B.
C.
D.
Cost push inflation could cause both output and unemployment
to decline; therefore REAL INCOME declines
Demand-pull inflation can reduce real output because inflation
diverts time and effort toward activities designed to hedge
against inflation
Mild inflation (< 3%) may be a healthy result of a prosperous
economy or have an undesirable effect on real income – ONLY
TIME CAN TELL!
Creeping inflation can lead to hyperinflation as people
speculate the inflation rate, begin to spend recklessly on
anticipated price increase, thus producing more inflation