1. Inflation

2. Definitions
Inflation – the general rise in the level of prices within an economy
Deflation – the general decline in the level of prices within an economy

3. Measuring Prices and Inflation
Inflation is measured using a Price Index
A price index is a series of goods and services that have a price, together called a market basket
Years are compared using a base year
Inflation is measured

4. Consumer Price Index A collection of 364 goods and services
Representation of the items that most consumers would buy
Everything from toothpaste to peanut butter

5. Types of Inflation Creeping Inflation – 1-3% per year
Hyperinflation – 500%+ per year
Stagflation – Stagnant economic growth coupled with inflation

6. Causes of Inflation Demand-Pull
All sectors in the economy try to buy more goods and services than the economy can produce
Shortages occur, which drives up market price
Prices are “pulled” up by excessive demand

7. Causes of Inflation Cost-Push
Rising input costs (Energy, labor, etc.) drive up cost to produce goods and services
Manufacturers raise prices to recover the increase in cost of production
Inflation occurs

8. Causes of Inflation Wage-Price Spiral
Higher prices lead to workers asking for higher wages
Higher wages push the prices higher

9. Causes of Inflation Excessive Monetary Growth
Occurs when the money supply grows faster than real GDP
When more money is available, people have more money to spend, causing a demand-pull effect

10. Consequences of Inflation
Reduced Purchasing Power
Distorted Spending Patterns
Encouraged Speculation
Distorted Distribution of Income
Creditors lose out to debtors