Econ 13 2 Inflation Inflation A general increase

Econ 13. 2 - Inflation

• Inflation - A general increase in prices • Purchasing Power - Ability to purchase goods and services • Price Index - Measurement that shows how the average price of a standard group of goods changes over time

Consumer Price Index (CPI) • Computed by BLS • Measures the price of a ‘market basket’ of goods • Can compare costs of the ‘market basket’ with the same group of goods from months or years ago

The ‘Market Basket’ • Eight Categories – – – – Food/drinks Housing Apparel/upkeep Transportation Medical Care Entertainment Education and Communication – Other

Determining CPI • Base Period (Market Basket) - Prices from 2002 -2004 - Changes every 10 years • CPI = updated cost/base period cost x 100 • Ex. - $330 (UC)/$200 (BC) x 100 = 165

Types of Inflation • Creeping Inflation – Low rate of inflation (1 -3% yearly) – Causes few problems – Businesses can plan budgets • Chronic Inflation – Steady increase in inflation rate over long period of time – Businesses cannot anticipate future costs

Hyperinflation • Worst kind of inflation • Money loses much of its value • Leads to total economic collapse

Causes of Inflation • Quantity Theory - Too much money in the economy causes inflation • Demand-Pull Theory - Demand that exceeds existing supplies causes inflation • Cost-Push Theory - Producers’ raising of prices to meet increased costs cause inflation • Economists look at all three elements to understand inflation

Wage-Price Spiral • Part of Cost-Push Theory • Rising wages cause higher prices • Higher prices cause higher wages…

Effects of Inflation • Purchasing Power Dollar will not buy same number of goods as in the past • Income - People on fixed incomes hit hard by inflation • Interest Rates - Do not take inflation into account