6.2 What is Inflation? In general, what you buy today will cost you more tomorrow. That is, if you buy $100 worth of groceries today, in one year those same groceries will likely cost you $102. Inflation is a measurement of how the price of merchandise increases (or decreases) over time. One of the surest indicators of inflation is the cost of groceries. Consider the cost of the following groceries over time GrdBf 1kg Chicken 1kg Milk 1L Butter 454 g Eggs doz Bread Flour 2.5kg Apples 1kg Potatoes 4.5kg Ketchup 1L Sugar 2kg

6.2 What is Inflation?

6.2 What is Inflation? To help simplify the look of this “basket” of groceries. We add all of the prices together and see how the total price changes

6.2 What is Inflation? To make the graph more general, a base year is chosen and the index is chosen to be 100 for that year. Note: the index value is not in dollars

6.2 What is Inflation? By what percent did the price change? How could you use the index to calculate this? $26.82 100 $35.18 131.2 % increase = $35.18-$26.82 $26.82 $8.36 x100 = x100 = 31.2% $26.82 Note: the index value is not in dollars

6.2 What is Inflation? By what percent did the price change? How could you use the index to calculate this? What is the average inflation rate per year? $26.82 100 $35.18 131.2 31.2% Note: that the actual inflation rate is lower due to the effects of compounding (about 4.0%) = 4.5% 7 years Note: the index value is not in dollars

6.2 What is Inflation? By what percent did the price change? How could you use the index to calculate this? What is the average inflation rate per year? The value calculated is called an Index. An index is a single number that represents a group of numbers. Indices are used throughout statistics to represent trends in groups of numbers.

6.2 What is Inflation?