Inflation Breedlove Economics 2014

Inflation Inflation is an increase in the average level of prices, not a change in any specific price. Deflation is a decrease in the average level of prices of goods and services. The biggest fear as an economy reaches full employment is inflation. As an economy reaches its production possibilities, costs rise, pushing up prices.

Types of Inflation Demand-Pull Inflation: prices rise as a result of increased demand for products. As supply goes down, prices rise – Generally healthy for an economy – Typically happens near full employment and when economy is at full capacity – If business can keep pace with demand then can trigger economy-wide growth

Types of Inflation…. Cost-Push Inflation: prices rise as a result of increased cost of production – Land, labor, raw materials, construction, etc. – Business can raise prices to increase profits, too – Typically more “dangerous” for an economy because triggers downward spiral Example…. Businesses anticipate increased price of production raise prices workers demand raises to meet increased prices (C.O.L.A) cost of production goes up!

Phillips Curve the Phillips curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of inflation

Hyperinflation In economics, hyperinflation is inflation that is very high or "out of control". While the real values of the specific economic items generally stay the same. In hyperinflationary conditions the general price level within a specific economy increases rapidly as currency loses its real value very quickly, normally at an accelerating rate!

Cause of Hyperinflation A massive and rapid increase in the amount of money (including bank credit, deposits, and currency) that is not supported by a corresponding growth in the output of goods and services. This results in an imbalance between the supply and demand for the money, accompanied by a complete loss of confidence in the money.

Stagflation In the 1970s, many countries experienced high levels of both inflation and unemployment also known as stagflation. OPEC oil crisis - Embargo Returning soldiers from Vietnam In the long-run workers and employers will take inflation into account, resulting in employment contracts that increase pay at rates near anticipated inflation.

Income Effects of Inflation Purchasing power of money falling People on fixed incomes hurt Often “punishes” thriftiness… Some actually benefit from inflation – – Big income earners – Property owners, asset owners, resource owners – Debtors (payoff with less valued dollars)

Real Output Effects of Inflation Often inflation (DP) helps stimulate an economy…BUT… As economy reaches full potential – CP inflation begins to rise… Costs begin to outpace price … C.O.L.A. raise prices on g/s… Speculators reign in production (hope of more $) Interests rates increase (pull $ out)

Consumer Price Index A consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households. The CPI in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” CPI = Cost of market basket in current year x 100 Cost of market basket in base year

The CPI “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) APPAREL (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).

Billion Prices Project – “real time” daily glimpse of the inflation rate on a variety of goods and services. – aggregates price information from multitude of online retailers around the world and give real-time inflation predictions. – BPP monitored daily price fluctuations of nearly 5 million items sold by more than 300 online retailers in more than 70 countries! Alternative Measures