Price Stability - Inflation. What is inflation? Inflation = General Rise in Prices This includes both product/services prices as well as income prices.

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What is Inflation? Inflation is rising general level of prices

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Presentation transcript:

Price Stability - Inflation

What is inflation? Inflation = General Rise in Prices This includes both product/services prices as well as income prices If they are both rising at the same time- that is a good thing In the US our income usually rises faster than the prices of goods/services Compare the 19 th Century to the 21 st Century

Inflation Inflation decreases our PURCHASING POWER Purchasing Power = the ability to purchase goods and services $1 in 1950 will not buy as much as $1 in 2013 – a drop in our purchasing power We need more money in 2013 to buy the same amount goods/services we bought in 1950

Tools Economist use a Price Index tool to determine how price of standard goods change over time. We will focus on Consumer Price Index (CPI) CPI = the typical “market basket” of the average consumer Market Basket = a specific set of goods we use continuously To calculate CPI – we use the base year We will use the CPI to determine inflation rate

Example The “Market Basket” can be divided into subgroups – like foods, clothes, Entertainment Your FOOD “market basket” would include the exact same items from month to month and year to year Ex – Pizza, Macaroni, Milk, Bread, and Coffee Your ENTERTAINMENT “market basket” would do the same Ex – Movie Tickets, Racecar Toys, Books In the end you would add the total of all the “market baskets” to get that months or years total then use the Cost from your base year and

Adding up our “Market Basket” Assume 2000 is your Base Year and that the base year’s CPI was ’s “market basket” totaled $500 In 2009 the same “basket” totaled $750 To get the CPI for 2009 we divide year 2000’s price with year 2009’s price CPI Formula = New Cost / Old cost x / 500 = 1.5 x 100 = 150 Now to calculate inflation we use the same formula we used for GDP Inflation Formula = New Year CPI – Old Year CPI x 100 New Year CPI 150 – 100 = 50 / 150 =.33 x 100 = 33 The Inflation rate from 2000 to 2009 was 33%

Calculating Inflation LUCKY for you I will not make you calculate the CPI before the inflation rate I will give the CPI for two given years and you will use the Inflation formula to calculate the rate of inflation The inflation formula is the same as the GDP one Inflation = New Year CPI – Old Year CPI X 100 New Year CPI

Who’s helped? Who’s hurt? Helped Cost of living wage increases Savings/investments that aren’t fixed rate Hurt Fixed income Fixed savings/investments