Inflation Who wins & loses from inflation

Falling Purchasing Power

INFLATION Economic condition of Average Prices Rising –Lowers the purchasing power of a dollar Economic numbers must be adjusted for inflation –Real numbers – adjusted for inflation –Nominal numbers – NOT adjusted for inflation A country sells 10 pairs of blue jeans in both 1999 & –Blue Jeans cost $20 in 1999 and $40 in 2014 (assume same exact jeans) –What is the change in nominal & real GDP for 2014? Nominal GDP doubles from $200 to $400 Real output is unchanged

Consumers notice when their paychecks start to buy less! COLA = cost of living adjustment Social security benefits has an annual COLA

Inflation: Expected vs. Unexpected Unexpected or sudden inflation is what really creates winners & losers in our economy In theory, when actual inflation is predictable, workers, employers, savers, lenders & borrowers have time to adjust & plan. – Therefore, expected inflation is less harmful Expected Inflation Actual Inflation

Who is Hurt by Unexpected Inflation? People on a fixed income –$500 a month pension +>Nominal dollars unchanged=> real income falls Minimum wage workers –Wage increases usually increases lag inflation Savers –Interest earned does not cover inflation rate…

Who is Helped by inflation? People in large amount of Debt –Fixed interest rates on Mortgages, Car Loans, Student Loans –Loan stays the same in Nominal Dollars –Loan falls in Real Dollars

Inflation Worksheet

Why Inflation is Bad? Difficult for Business to plan –price goods/services Lowers value of our currency Lowers purchasing power (real value of money) Raises long term interest rates

2-Types of Inflation Demand-Pull Inflation: –Too many dollars chasing too few goods –Spending increases faster than production –Demand Side Inflation Cost-Push Inflation –Increase in cost of any factors of production (input prices) –examples: price of oil, labor, steel, etc….) –Supply Side Inflation