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CPI (Consumer Price Index) and Inflation Inflation • An increase in the average price level for goods and services across the economy • A rise in the cost of one product is not a problem- but what if the price of tires, gas, groceries, toys, wood, cars, steel, etc were on the rise? • Late 1970’s • Annual prices were increasing at a rate of 13% per year • Car that cost $10,000 this year would cost $11,300 next year • A $100 grocery bill would increase by $13 • People will spend money before it loses any more value- especially on big items like cars • Inflation causes more inflation Current Inflation Information • http://inflationdata.com/inflation/inflation_rat e/currentinflation.asp (shows current rate) • http://www.businessinsider.com/deflation-riskin-the-us-is-escalating-2015-1 (Jan deflation article) • http://www.nytimes.com/2015/10/14/business/ economy/a-2nd-fed-governor-opposes-raisingrates-this-year-breaking-with-yellen.html (should we raise the rates) Consumer Price Index (CPI) • 80,000 of the most commonly bought consumer goods • Rental housing, utilities, food, clothes, entertainment, health care • http://www.bls.gov/cpi/cpifaq.htm#Ques tion_3 • Total is compared to a base yearfigures are calculated for various regions around the country Producer Price Index (PPI) • Measures the different prices of goods at all stages of the production process • Figures are also compared to a base year- tally of products is kept COLA (Cost of Living Adjustment) • Worker has to earn more money to keep up the standard of living that he or she had last year • Professions have to keep up with inflation by offering workers cost of living increases • http://www.ssa.gov/news/cola/ COLA for Social Security at the beginning of 2015 • http://money.cnn.com/2015/10/13/retirement/ social-security-cola-2016/index.html • Bad news for Social Security recipients in 2016! Supply Side Inflation • Resource prices in our economy go up for various reasons • Increased prices can force cost to increase for other consumer and producer goods Demand Side Inflation • People buying too many goods • Too many dollars chasing too few goods • Producers cannot keep up with consumer demand, and they raise prices Wage Price Spiral • When prices begin to rise, workers will begin to demand higher wages Hyperinflation • Inflation left unchecked and the money supply continues to grow too quickly- prices rise rapidly • Germany in 1920’s • This week you buy the loaf of bread for $1, next week it is $50 Deflation • Average prices for goods and services falls across the economy Disinflation • Inflation falls from a higher rate to a lower rate without becoming deflationary • Inflation rates in 1980 were 13%, in 1985 they were 4% Stagflation • High inflation • High unemployment • Early 1970’s is a perfect example