Inflation & the Economy Inflation is the general increase of prices. The U.S. has not had only inflation problems, the great depression was during a time when deflation was a big problem.

Price Levels in the U.S. Between 1928 and 1990

The Rule of 70 This is a mathematical equation used to determine the time it takes for the price level to double with a given rate of inflation. The equation is: 70 / percentage annual rate of inflation.

The Different Types of Inflation Demand-pull inflation Cost-push inflation Structural inflation

Demand-pull Inflation Inflation that results from an increase in demand. When demand is high and supply is limited, prices rise. Because people want these limited goods and services, they will pay a higher price for them. As a result, demand pulls up price.

Cost-push Inflation Inflation that results from an increase in costs. The wage demand from labor unions can lead to cost increases. If workers gain a wage increase, the company must pay higher production costs. If possible, the company passes these costs on to consumers in the form of higher prices.

Structural Inflation Inflation caused by change in the structure of demand. Say if demand shifts from metal containers to plastic containers. The shift in demand will cause prices to rise in the chemical industry, which produces plastic containers. However, prices do not fall as easily as they rise. Thus prices fail to decline in the metal industry, where demand for metal containers has fallen off. The result is inflation because of the net increase in prices.

Some Other Stuff It is possible for more than one type of inflation to occur at the same time. With the metal and plastic container example, demand-pull and structural inflation happened simultaneously.