1. Coach Guttmann Economics
Inflation
Coach Guttmann
Economics

2. Inflation – Definition
Inflation is an increase in the general level of prices It is measured by the Consumer Price Index (CPI) (CPI = current year prices/base year prices x 100) Deflation is a lowering of the prices level like when a financial “bubble” bursts

3. Types of Inflation
Expected – the normal rate (1-2% a year) “Unanticipated” = higher than expected rate Creeping = 3% or less Galloping = 10 – 25% Hyperinflation = > 50% a month 600% a year) Stagflation = rising unemployment and prices

4. How Inflation is graphed
US Economy
AS1 PL AS
PL = Price Level
Prices for whole US
AS = Aggregate Supply
Supply for whole US
AD = Aggregate Demand
Demand for whole US
rGDP = Real GDP
GDP adjusted for inflation P2 P1 AD
rGDP
GDP1

5. How Inflation is caused
Cost - Push
Demand - Pull
AS1 PL AS PL AS P2 P2 P1 P1
AD1 AD AD
rGDP
rGDP
GDP1
GDP1

6. How does Inflation effect you?
Who gains?
Who it hurts?
Borrowers who pay back at a fixed rate
Stock investors
Commodity investors
Lenders who get paid back at a fixed rate
Savers
Retirees on fixed income
Bond investors

7. Adjustable Rates
Rates that vary – depend on indexes that reflect price level changes C.O.L.A. (Cost of Living Adjustment) A.R.M. (Adjustable Rate Mortgage) Borrowers and Lenders may be effected differently because of lag time of rate changes

8. Practice – Hurt, Gain, or Uncertain?
For each of the following scenarios, determine if the individual is helped or hurt by (unexpected) inflation. Explain each answer.

9. #1 – Hurt, Gain, or Uncertain?
Jack retired five years ago and now lives on a fixed-income annuity and a small savings account that pays him 1% interest on the balance. The current inflation rate is 1.7%

10. #1 – Hurt, Gain, or Uncertain?
Jack retired five years ago and now lived on a fixed-income annuity and a small savings account that pays him 1% interest on the balance. The current inflation rate is 1.7% Jack is HURT - His income is less than inflation

11. #2 – Hurt, Gain, or Uncertain?
Jill has worked at her current position without a raise for 4 years. Because inflation has risen 5% over the course of the 4 years, she has struggled to pay day-to-day living expenses and her house payment. She asked her employer for a raise and he gave her a 6% raise because she is such a good worker.

12. #2 – Hurt, Gain, or Uncertain?
Jill has worked at her current position without a raise for 4 years. Because inflation has risen 5% over the course of the 4 years, she has struggled to pay day-to-day living expenses and her house payment. She asked her employer for a raise and he gave her a 6% raise because she is such a good worker. Jill GAINS - Her raise is more than inflation