1. Consumer Price Index Measures change in prices over time Market Basket of the first price period = 100% at base year US CPI is calculated by finding prices of 80,000 goods across 85 geographic areas Collected by Bureau of Labor Statistics

2. Calculating Inflation Annual rate of change of general price level Inflation Rate = (Δ Price Level --------------------- x 100 Beginning Price Level)

3. Types of Inflation Deflation – decrease in general price 20’s recession 30’s depression Creeping Galloping Hyper

4. Causes of Inflation Demand-Pull – high demand pulls prices up and leads to shortages Price-Push – wage demands drive prices up or a quick spike in cost of inputs Gov’t deficit spending – similar to demand-pull but it’s only demand from the government Money supply grows faster than GDP

5. Consequences of Inflation The dollar buys less Spending habits change Durable goods purchases decrease Increased speculation Debtors benefit over creditors