Download Who wins & loses from inflation

Inflation
Who wins & loses from inflation
Falling
Purchasing Power
INFLATION
• Economic condition of Average Prices Rising
– Lowers the purchasing power of a dollar
• Economic numbers must be adjusted for inflation
– Real numbers – adjusted for inflation
– Nominal numbers – NOT adjusted for inflation
• A country sells 10 pairs of blue jeans in both 1999 & 2014.
– Blue Jeans cost $20 in 1999 and $40 in 2014 (assume same exact jeans)
– What is the change in nominal & real GDP for 2014?
• Nominal GDP doubles from $200 to $400
• Real output is unchanged
Consumers notice
when their paychecks
start to buy less!
COLA
= cost of living adjustment
Social security benefits has an
annual COLA
Inflation:
Expected vs. Unexpected
• Unexpected or sudden inflation is what really creates winners
& losers in our economy
• In theory, when actual inflation is predictable, workers,
employers, savers, lenders & borrowers have time to adjust &
plan.
– Therefore, expected inflation is less harmful
Expected
Inflation
Actual
Inflation
Who is Hurt by Unexpected Inflation?
• People on a fixed income
– $500 a month pension +>Nominal dollars unchanged=> real income falls
• Minimum wage workers
– Wage increases usually increases lag inflation
• Savers
– Interest earned does not cover inflation rate…
Who is Helped by inflation?
• People in large amount of Debt
– Fixed interest rates on Mortgages, Car Loans, Student Loans
– Loan stays the same in Nominal Dollars
– Loan falls in Real Dollars
Inflation Worksheet
Why Inflation is Bad?
• Difficult for Business to plan
– price goods/services
• Lowers value of our currency
• Lowers purchasing power
(real value of money)
• Raises long term interest rates
2-Types of Inflation
• Demand-Pull Inflation:
– Too many dollars chasing too few goods
– Spending increases faster than production
– Demand Side Inflation
• Cost-Push Inflation
– Increase in cost of any factors of production (input prices)
– examples: price of oil, labor, steel, etc….)
– Supply Side Inflation