1. “I remember when a movie only cost a nickel……”
Inflating Inflation
“I remember when a movie only cost a nickel……”

2. Hershey Bar U.S. National Average

3. Then…

4. Inflation Simulation – Where did inflation come from?
Round # 1 –
Round # 2–
Round # 1 – Economy is doing really well = low unemployment. Everybody spends more of their disposable income as consumer confidence is high! Round # 2 – Lower interest rates can cause inflation by making it less expensive to borrow money. Round # 3 – Government spending increases or U.S. Government can buy bonds from bondholders.
Round # 3–

5. Inflation Simulation Critical-Thinking Questions
How were students who saved in round 1 and 2 hurt by inflation?
The value of their dollar went down each round.
Round #1 money is worth less in round #2
2. How does inflation affect a person on a fixed (unchanging) income?
Purchasing power decreases every year.
Their fixed income buys less because of the gradual increase in prices.

6. Anticipated v. Unanticipated
vs. Unanticipated: Unpredictable, hurtful.
Anticipated: Healthy, plan accordingly.

7. Creeping:
1-3% a year and healthy (Anticipated)

8. Chronic- Changes month to month Ex. Recent gas prices 11/16/10 $3.07
11/16/10 $3.07
5/09/11 $4.29
39% increase.
10/9/
11/28/
24% decrease.

9. Hyper- 100-500% in 1 month (Can crush banks and savings accounts)
Ex. Natural disasters can cause hyper inflation

10. Wage-Price Relationship “Spiral”
Causes of Inflation
Demand-Pull: The demand for the goods goes up so prices of the good go up as well. Cost-Push: Cost of producing goods pushes the price of the goods up. ex. Min wage increase
Wage-Price Relationship “Spiral”
-Inflation causes people to demand higher wages.
-People spend more money from their wage increases, which causes more inflation.
The cycle repeats itself….
-People spend more money from their wage increases, which causes inflation.

11. Who’s hurt/helped by inflation?
1. Your friend rents an apartment with a three year lease.
Gain The price of their rent will not rise for three years while local rents increase for inflation.

12. Who’s hurt/helped by unanticipated inflation
2. You borrow money from Chase Bank at 3% for 30 years.
Gain You are paying back a fixed interest lower than rate of inflation.

13. Who’s hurt/helped by inflation?
3. A retired man lives entirely on income from Social Security.
Gain or break even.
Social Security adjusts to inflation
because it has a COLA-
Cost of Living Adjustment

14. Who’s hurt/helped by inflation?
4. Banks issue a lot of long-term fixed-rate loans. Hurt They are paid back in fixed interest rate. If inflation % exceeds the rate of loan, banks are being paid back in dollars that are worth less than inflation rate.

15. Who’s hurt/helped by inflation?
5. Your savings from your job are in a savings account paying a fixed rate of interest.
Hurt
The money you have in the bank no longer beats inflation. As time goes on it loses value (buys less).

16. Consumer Price Index
Consumer Price Index: A “Market Basket” of goods for a typical urban middle-class household.
Goods
Bread
Appliances
Jewelry
Postage
Cosmetics
Services
Hospital Visit
Bus Fair
Dental Visit
Legal Services
Rent

17. Calculating Inflation
The steps:
The Consumer Price Index (CPI) is used to calculate how prices have changed over the years due to inflation.
Question: “What would a product cost in 1994 if it costs $10.00 today?” (2014)
1) Read the question and determine what year you are solving for…
2) Determine the CPI for the given year AND the year you are solving for…
3) Set the equation up…
Formula is:
4) Plug the numbers and solve…
I am solving for 1994
Unknown Year’s CPI
148.2
x Given Year’s PRICE
= Unknown Year’s Price
Given Year’s CPI
x $10.00
= $6.26
236.7
Now you try…

18. The Trial of Ms. Ann Flation
Time for a Trial!!!!!
The Trial of Ms. Ann Flation

19. The Trial Witnesses for Prosecution Witnesses for Defense
Mr. Con Glomerate: Business owner who charges an arm and a leg. Ms.Fix Ed Income: Old retiree who misses her Bingo. Prof. I Can’t Getahead: College econ professor looking for a raise. .
Ms. Iona Lots:
Real estate investor.
I.O. Manny Bucks:
Big spender who loves his credit cards.
Ann Flation:
The woman who started it all.

20. Who was helped/hurt T - Chart
Who is Hurt By Inflation and Why?
Who is Helped by Inflation and Why?
Mr. Con Glomerate- rising production costs make his products more expensive.
Ms. Fix Ed Income- her income is losing money because prices are rising and her income is fixed.
Prof. I Can’t Getahead- inflation is causing prices to rise faster than his income.
Ms. Iona Lots- her real estate investments are growing fast!
Mr. I.O. “Manny Bucks”- he is paying his debt back with inflated dollars, therefore he is actually paying less.