Inflation Inflation concepts: Explain the difference between general price rises and a price rise in a particular market Distinguish between inflation, deflation, and disinflation Inflation Statistics: Construct a simple weighted price index List and explain the limitations of the Consumer Price Index (CPI) Describe alternative measures of changes in the price level such as the Producers Price Index (PPI)

NZ Inflation rates in graph form… What is the trend over time?

 Before we go into the history of inflation in NZ  Ponder this…….  If the price of butter rose by 4c per 500g block, would that be inflation?  If the price of petrol and oil rose by 3c a litre would that be inflation?  What about the situation where the average price of all fruit and vegetables rose by four per cent? What is Inflation

S’ S D D’ D S Q’ Q P’ P Quantity Price ($) Quantity Q Q’ P P’ Decrease in Supply Increase in Demand  Just because some prices are rising does not necessarily mean inflation is occurring. These are relative price changes.

 Markets are constantly changing because supply and demand conditions for different commodities (goods and services) are constantly changing.  If the supply of a commodity falls or the demand for a commodity rises, competition among buyers will force the price up.  When the price increases for a single good in most cases this will NOT cause inflation Individual Price Rise Vs General Price Rise

 Only when the general (average) price is rising or falling will we use the terms inflation or deflation.  However, the increase in price for some commodities can impact on many other prices.  E.g. an increase in the price of fuel (i.e. diesel), electricity, internet, etc.  This is because these factors are a cost of production. So when price of petrol increase costs of production will increase. A change in the General Price Level…

 Market demand = Sum of all individual demand for a single good or service  Market supply = Sum of all individual supply for a single good or service  Aggregate Demand = Total demand in the economy for all goods and services  Aggregate Supply = Total supply in the economy for all goods and services Market Demand and Supply VS Aggregate Demand and Supply

 Definition: an increase in the general price level over a period of time.  Measured by: percentage increase in the Consumers Price Index (CPI).  Inflation reduces the purchasing power of money (cannot buy as much for the same amount in dollars). What is inflation?

 Purchasing Power = The amount of goods your income will buy

 Think back? What is the consumer price index?  Measures changes in the price level of a “basket” of consumer goods and services purchased by households. It is a type of index that allows us to calculate the rate of inflation. CPI ?

Facts about the CPI Counts the goods bought by households Excludes payments like charitable donations and income tax Currently excludes interest rates Measures the price changes in consumer goods it is organised into nine groups Covers 700 individual goods and services excludes goods that are considered investments e.g residential properties, shares and others it is reviewed every three years

 In 2000 this shopping trolley full of groceries cost $100  In 2009 this same trolley would cost $120  OR in 2009 for the same price of $100 you could only buy this amount. $100 $120

DeflationDisinflation  A sustained decrease in the general price level over a period of time.  The exact opposite of inflation.  Where the rate of inflation is decreasing  (prices have still risen but by a smaller amount than the previous period)  (A special type of inflation)

 Hyperinflation research project…