1. Inflation

2. Essential Standards
The student will define the Consumer Price Index (CPI) and inflation.
The student will explain how inflation is calculated.
The student will give examples of who benefits and who loses from inflation.

3. Inflation Over the years, prices rise and fall…
In the American economy, they have mostly risen.
Inflation—a general increase in prices.
Purchasing power—the ability to purchase goods & services…
As prices rise, purchasing power…
Declines.

4. Nominal and Real Values
To compare the difference between prices over time, economists use two measurements.
Nominal value—prices NOT adjusted for inflation…
Real value—prices that ARE adjusted for inflation.
For example—a movie ticket cost 35 cents in 1945…
35 cents is the nominal value…
But 35 cents was WORTH $4.08 in 1945…
So the REAL cost of a ticket in 1945 was $4.08.

5. Measuring Inflation
Consumer Price Index—Is computed each month by the Bureau of Labor Statistics.
It measures the prices of a “market basket”…
A representative collection of goods and services.

6. Contents of the Market Basket
Utility Gas—100 therms
Electricity—500 Kwh
Fuel oil—per gallon
Gasoline—regular unleaded
Bread—white
Ground beef—all types—per pound
Whole chicken—per pound
Milk—all types—per gallon
Apples—red delicious
Bananas
Naval oranges
Tomatoes
Orange Juice—Frozen
Coffee—ground roast—all sizes
Iceberg lettuce
Eggs—large—per dozen

7. Average price of a dozen eggs in January of 1997: $1.14
Average price of same in October of 2007: $1.77
Average price of same in September of 2008: $2.09
Average price of same in December of 2009: $2.20
Average price in February 2013: $1.93

8. Degrees of Inflation
When the inflation rate stays between 1% and 3%, it causes few problems…
When it rises above to 5%, the economy can become unstable.
Hyperinflation—out of control inflation…can go as high as 100% to 500% per month.

9. A $10 million bill from Zimbabwe…
Worth approximately 25 cents in US currency.

10. Several different theories are used in explanation.
Economists are unsure of exactly what causes prices to rise at every level.
Several different theories are used in explanation.

11. Demand-Pull Theory
States that inflation occurs when demand for goods and services exceeds supplies.
During wartime, or after a natural disaster, demand jumps…
Leading to higher prices.

12. Cost-Push Theory
Inflation occurs when producers raise prices to meet increased costs.
Such as increases in the minimum wage…
Or the price of gasoline.
Government regulation can also lead to inflation.
Pollution restrictions make doing business more expensive.

13. Effects of Inflation
Purchasing power decreases--$1 bought $1 worth of goods in 2006…
If the inflation rate is 10%...
$1 worth of goods will cost $1.10 in 2007.

14. Effects of Inflation Inflation rates often exceed wage raises…
Leading to a net loss of income.
In 2005, the average teacher raise was 2.1%...
And the inflation rate was 3.1%.

15. Inflation is bad for SAVERS…
The power of interest is also effected…
If you have your savings in an account that pays 3% interest…
And the inflation rate is 5%...
Your purchasing power will decrease by…?
2%.

16. Inflation is good for BORROWERS
Suppose I borrow $100 in 2008…
I’m paying 5% interest…
And the inflation rate is 10% per year…
When the lender gets their $ in one year…
That money will only be worth…
$95.00 in 2009 money.
They will have LOST…
10 DOLLARS in REAL money.
$100
+5% =
$105.00
-10% =
$95.00

17. Deflation
Americans over age 30 have experienced inflation for their entire lives…
Lately, however, we have entered a period of rising unemployment…
And falling capital investment.
Some economists have predicted a period of deflation—
A sustained drop in price levels.

18. COLA Cost of Living Adjustment
An increase in your wage that matches the increase in inflation.