Facing Economic Challenges Inflation Facing Economic Challenges

Key Questions

What is Inflation? Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. As a result of inflation, the purchasing power of a unit of currency falls. For example, if the inflation rate is 2%, then a pack of gum that costs $1 in a given year will cost $1.02 the next year. As goods and services require more money to purchase, the implicit value of that money falls.

How is it Measured? The Consumer Price Index measures changes in the price level of a market basket of consumer goods and services purchased by households. 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).

Each month, BLS data collectors visit or call thousands of retail stores, service establishments, rental units, and doctors' offices, all over the United States, to obtain information on the prices of the thousands of items used to track and measure price changes in the CPI. They record the prices of about 80,000 items each month, representing a scientifically selected sample of the prices paid by consumers for goods and services purchased. United Kingdom CPI

What Is the Impact of Inflation? Decreasing Value of the Dollar Rising consumer price index represents declining value of the dollar People on a fixed income are especially vulnerable each dollar they have buys less every year Inflation helps people who borrow at a fixed rate of interest In Hungary after WWII prices doubled every fifteen hours! In 2008 a loaf of bread in Zimbabwe cost $35 million dollars!

In Germany in early 1923 the cost of a loaf of bread was 1,500,000 marks. Money became so worthless that people had to lug wheelbarrows full of bricks of cash to buy groceries. Workers were paid twice daily, before lunch and at the end of the workday, so that they could buy goods before their money lost value. By the end of the year bread was 200,000,000 marks!

What Is the Impact of Inflation? Increasing Interest Rates Lenders raise interest rates to ensure profit on loans Businesses avoid borrowing to expand or make capital improvements Consumers less likely to finance high-priced items Monthly credit card payments go up as rates rise

What Is the Impact of Inflation? Decreasing Real Returns on Savings Interest on savings tends to increase during inflationary times Any interest you earn on investments is worth less than it was before

Hyperinflation

Deflation