Inflation and CPI

Objectives Define Inflation Examine the costs/benefits of inflation Explain how CPI measures inflation Use CPI to compare Historic Prices with Current Prices C3 PO2, PO 4, PO6

Inflation & Deflation Inflation is an overall increase in prices related to declining value (purchasing power) of a currency – The US Dollar averages about 3% inflation per year Your $1 purchase in 2010 will cost you $1.30 in 2020 Pay more and more for less and less Deflation is an overall decrease in prices related to increasing value of a currency – In 2009, prices of many goods deflated as the economy stalled – Why might this be dangerous for an economy?

Concerns over Inflation Can’t anticipate cost of goods/services Inflation eats value of savings/investments Fixed incomes become less valuable over time

Worst Case Scenarios 1946 Hungary – Prices Double ever 15 hours – 41,900,000,000,000,000,000% (41.9 quintillion) Germany – Prices double every 49 hours – 3,250,000,000% 2000 Zimbabwe – Prices double every 24 hours

Inflation Causes Cost- Push Inflation – As costs of production rise, producers pass the costs on to the consumers – Price of gold up 300% in 10 years, driving up jewelry prices Demand-Pull Inflation – When Consumer demand rises faster than producers can respond, Low Supply drives prices higher – Phoenix grew by 400,000 people, driving up the prices of rent and homes

Costs/Benefits Of Inflation Costs Discourages saving in hopes of economic security Unexpected spikes in inflation hurt lenders Fixed Incomes erode in buying power Encourages Higher Prices The Federal Reserve controls the money supply to keep prices realtively stable Benefits Encourages investment in hopes of economic security Unexpected spikes in inflation help borrowers Encourages Productivity in workers (have to get a raise) Encourages Spending

Inflationary/Deflationary? Technology Does technology generally have an inflationary or deflationary effect on the economy? Explain Education Does education generally have an inflationary or deflationary effect on the economy? Explain

Inflation Hedges Productive commodities Iron Copper Petroleum Corn Beans Rice Sugar Cattle Pork Bellies Precious Commodities Gold Silver Platinum Palladium Lanthanum Coltan Diamonds & Gems Works of Art Sports Memorabilia

Consumer Price Index CPI =“changes in the prices paid by urban consumers for a representative basket of goods and services.” 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).

CPI Use Function Used to measure inflation & Compare Prices – Year to Year – Month to Month – Area to Area Fun 1908 Model T Ford $850=? 1931 Babe Ruth Salary 80k=? 1994 Diamond engagement ring $450=? a/inflation_calculator.ht m a/inflation_calculator.ht m

CPI Vs Core CPI CPI Includes Volatile Items – Petroleum – Food – Better Picture of What Consumers are experiencing – Better Predictor of “Consumer Perceptions” – Heavy influence on consumer spending Core CPI Excludes Volatile Items – Better Gage of Business & government experience – Disconnect between Gov. and Business Managers with consumers/employees

Cost of Living Indices Domestic Compare salary needed to maintain similar lifestyle in different US city Move from Phoenix to…. alculators/savings/moving- cost-of-living-calculator.aspx alculators/savings/moving- cost-of-living-calculator.aspx International Compare salary to similar position in different country How much does a teacher make in Germany vs USA? g/ g/