Inflation is a sustained increase in the prices of goods and services (or the cost of living). To measure inflation, we look at changes in the price of a market basket of goods or services households typically purchase with their income Time prices

4 We use the CPI to measure changes in the cost of living experienced by households. 4 The CPI is the “narrow” price index in that the market basket used to construct it includes items purchased by households. 4 The inflation rate is simply the percentage change in the CPI from one period to the next.

How would we calculate the inflation rate for, say, the year 1990?

On average, the prices of goods and services in the CPI market basket increased by 5.4 % from 1989 to 1990

 We want to examine the following issues : What are the costs of inflation? Is there a tradeoff between inflation and unemployment? Assuming there is a tradeoff between inflation and unemployment, can unemployment be “too low”? Why is it that once inflation starts, it tends to persist? Is monetary expansion to blame for inflation?

Inflation is a drag! ³Inflation results in the arbitrary and inequitable distribution of real income and wealth. ³Inflation creates an opportunity to profit from non-productive speculative activities. ³Inflation affects expectations about future increases in the cost-of-living, giving rise to inflation inertia. ³Inflation distorts the information conveyed by market prices (including wages). ³Inflation undermines confidence in economic and political institutions.

Lenders Taxpayers Holders of currency People on fixed incomes With the cost-of-living rising, what I have here is losing value by the hour We mortgage lenders got creamed in the 70s and early 80s

 Has the growth of my income kept pace with the cost of living?  Is my wealth concentrated in assets that tend to hold their value in an inflationary environment?  I am in debt? Precious metals, rare art, and commercial real estate are good plays if you expect inflation A lot of people lost money in the stock market in the 70s

Ave. Income of Seattle Transit Employees The question is: were they better off in 1996 in terms of real purchasing power?

Are Seattle transit employees any better off, at least based on these figures?