Download Inflation ch 13.2

Inflation ch 13.2
What goes up must come down, unless it’s prices.
What is inflation?
 Inflation
is a general increase in prices.
It’s when aggregate demand increases
more than aggregate supply.
 Deflation:
 During
prices go down
a time of inflation purchasing
power goes down.
How is inflation calculated?

The way to measure inflation is to use a price
index which is a measurement of the average
price of a group of items.

Consumer Price Index (CPI) is THE price
index created and used by the Bureau of
Labor Statistics (BLS) it measures the
“market basket” which is a collection of goods
and services the average urban consumer
buys.

Market basket – cereal, mik, rent, clothing,
airfare, gas, prescriptions, newspapers,
tution, etc.
Inflation rates

Inflation rate is the percentage of change
from one year to the next

Core inflation rate: inflation of all things
except the effects of food and energy prices

Hyperinflation: excessive inflation that is out
of control.
Causes of Inflation

Quantity theory: an increase in the money
supply can cause inflation.

Demand Pull: demand for goods rises faster
than the amount of supply

Cost Push inflation: Production cost up,
prices up. Increase in price in natural
resources or wages can cause this type of
inflation. So producers raise prices to meet
increased costs.
Wage Price Spiral
 Cost
push inflation can cause a wage
price spiral, which is when wages go up
causing prices to go up, which causes
workers to ask for higher wages.
 Also, when unemployment falls to very
low levels, we get an increase in prices.
Inflation is natural
A
healthy economy expects to have
inflation rates from 3 to 5%. It signals
growth

BUT…
There are negative aspects of
inflation
 1.
Purchasing power of the dollar goes
down
 2. Real value of wages goes down even
though nominal goes up
 3. Interest Rates go up to try and slow
down spending
 4. Savings worth less
 5. Production costs go up
 You make $10 per hour and get a 3%
raise ($.30). Inflation is 5%. Are you
making more money?