Inflation

Definitions Inflation – the general rise in the level of prices within an economy Deflation – the general decline in the level of prices within an economy

Measuring Prices and Inflation Inflation is measured using a Price Index A price index is a series of goods and services that have a price, together called a market basket Years are compared using a base year Inflation is measured

Consumer Price Index A collection of 364 goods and services Representation of the items that most consumers would buy Everything from toothpaste to peanut butter

Types of Inflation Creeping Inflation – 1-3% per year Hyperinflation – 500%+ per year Stagflation – Stagnant economic growth coupled with inflation

Causes of Inflation Demand-Pull All sectors in the economy try to buy more goods and services than the economy can produce Shortages occur, which drives up market price Prices are “pulled” up by excessive demand

Causes of Inflation Cost-Push Rising input costs (Energy, labor, etc.) drive up cost to produce goods and services Manufacturers raise prices to recover the increase in cost of production Inflation occurs

Causes of Inflation Wage-Price Spiral Higher prices lead to workers asking for higher wages Higher wages push the prices higher

Causes of Inflation Excessive Monetary Growth Occurs when the money supply grows faster than real GDP When more money is available, people have more money to spend, causing a demand-pull effect

Consequences of Inflation Reduced Purchasing Power Distorted Spending Patterns Encouraged Speculation Distorted Distribution of Income Creditors lose out to debtors