Inflation and CPI What is happening with prices? Inflation rate is needed to find Real GDP Calculate the CPI (consumer price index) in order to calculate the rate of inflation

Definitions Inflation = average prices are increasing Goods and services become too expensive Deflation = average prices are decreasing Producers aren’t making as much profit Stagflation= prices and unemployment are rising simultaneously Double economic nightmare as goods cost more and more people are out of work Hyperinflation=extreme rise in prices

Zimbabwe

Hyperinflation Examples Germany (1923) 29,500 % inflation rate ; prices doubling every 3.7 days Zimbabwe (2008)- 79 billion % Loaf of bread cost 35 million Hungary 1946 – 13.6 quadrillion prices doubled every 15 hours Venezuela- current almost 1 million percent . Prices doubling every few weeks 20 Million bolivars for fast food meal For one dozen eggs in Venezuela; You can buy 101 dozen eggs in the U.S. for the same price Minimum wage equal to around $1.61USD

Inflation Inflation affects people’s purchasing power People on fixed income are hurt most Workers who receive cost-of-living increases (COLA’s) aren’t When making loans at fixed rates, an unanticipated rise in price level by more than the lender anticipated hurts the lender since the money repaid will have less purchasing power. Borrowers who borrow at fixed rates will benefit from unanticipated inflation. Their interest rates remain stable as price rise and they pay back their loan with money that has less purchasing power than the money they borrowed.

Consumer Price Index CPI measures the price change of a selected group of consumer goods and services overtime. Thousands of goods and services are selected and placed in what is called a “market basket.” Each month the “market basket” is checked to see if the overall price of the basket has increased or decreased.

CPI and Inflation CPI is calculated by looking at a base year’s prices and comparing to current year’s prices CPI = cost of market basket in year looking for x100 = CPI for year look for cost of market basket from base year CPI = 1000 = 1.04 x 100 = 104 (CPI) 960 To figure out inflation between the two years- 100(base always 100) To 104 (CPI) = 4% increase = 4% Inflation

Fred CPI Statistics https://fred.stlouisfed.org/series/CPIAUCSL

Practice 2010= $1455 2015= $1600 CPI= Inflation Rate=

Practice 1960= 710 2000= 1145 CPI= Inflation Rate=

1977= 1035 2015= 1195 CPI= Inflation Rate=

2013= 1365 2015= 1360 CPI= Inflation Rate=