INFLATION AND CPI What is happening with prices

INFLATION AND CPI • What is happening with prices? • Inflation rate is needed to find Real GDP • Calculate the CPI (consumer price index) in order to calculate the rate of inflation

WHAT IS INFLATION? = is when the buying power of money goes down and prices go up.

WHAT IS DEFLATION? = is when prices fall and the value of money Dramatic periods of deflation in the U. S. are rare. The last major increases. period of deflation was from 1930 to 1933, which was during the Great Depression.

DEFINITIONS • Stagflation= prices and unemployment are rising simultaneously • Double economic nightmare as goods cost more and more people are out of work • Hyperinflation=extreme rise in prices

ZIMBABWE

HYPERINFLATION EXAMPLES • Germany (1923) 29, 500 % inflation rate ; prices doubling every 3. 7 days • Zimbabwe (2008)- 79 billion % Loaf of bread cost 35 million • Hungary 1946 – 13. 6 quadrillion prices doubled every 15 hours • Venezuela- current almost 1 million percent. Prices doubling every few weeks 20 Million bolivars for fast food meal For one dozen eggs in Venezuela; You can buy 101 dozen eggs in the U. S. for the same price Minimum wage equal to around $1. 61 USD

INFLATION • Inflation affects people’s purchasing power • People on fixed income are hurt most • Workers who receive cost-of-living increases (COLA’s) aren’t • When making loans at fixed rates, an unanticipated rise in price level by more than the lender anticipated hurts the lender since the money repaid will have less purchasing power. • Borrowers who borrow at fixed rates will benefit from unanticipated inflation. Their interest rates remain stable as price rise and they pay back their loan with money that has less purchasing power than the money they borrowed.

CONSUMER PRICE INDEX • CPI measures the price change of a selected group of consumer goods and services overtime. • Thousands of goods and services are selected and placed in what is called a “market basket. ” • Each month the “market basket” is checked to see if the overall price of the basket has increased or decreased.

WHAT IS IN A MARKET BASKET? • Food and Beverages (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks) • Housing (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture) • Clothes (men's shirts and sweaters, women's dresses, jewelry) • Transportation (new vehicles, airline fares, gasoline, motor vehicle insurance) • Medical Care (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services) • Recreation (televisions, toys, pets and pet products, sports equipment, admissions) • Education and Communication (college tuition, postage, telephone services, computer software and accessories) • Other Goods and Services (tobacco and smoking products, haircuts and other personal services, funeral expenses)

CPI AND INFLATION • CPI is calculated by looking at a base year’s prices and comparing to current year’s prices CPI = cost of market basket in year looking for cost of market basket from base year x 100 = CPI for year look for CPI = 1000 = 1. 04 x 100 = 104 (CPI) 960 To figure out inflation between the two years 100(base always 100) To 104 (CPI) = 4% increase = 4% Inflation

FRED CPI STATISTICS • https: //fred. stlouisfed. org/series/CPIAUCSL

PRACTICE • 2010= $1455 • 2015= $1600 • CPI= • Inflation Rate=

PRACTICE • 1960= 710 • 2000= 1145 • CPI= • Inflation Rate=

1977= 1035 2015= 1195 CPI= Inflation Rate=

• 2013= 1365 • 2015= 1360 • CPI= • Inflation Rate=