1. Notes: Inflation By: Mrs. Erin Cervi

2. Inflation Basics Inflation: an increase in the economy’s general price level. – As prices increase, purchasing power declines (it reduces the value of money) – Each month, the U.S. Bureau of Labor Statistics (BLS) releases an estimate of the level of the consumer price index (CPI) and the rate of inflation in the United States for the previous month. The most widely reported measurement of inflation is the Consumer Price Index – Extremely high inflation= hyperinflation – Decrease in the general price level= deflation understand that an increase in price in any one good or even a few goods does not constitute inflation. Supply and demand changes can impact price without impacting inflation.

3. Consumer Price Index Consumer Price Index (CPI) – Measurement used to determine inflation and deflation where the prices of over 200 categories of consumer goods and services are accounted throughout the month. Inflation has average about 3% a year for the last decade

5. Reasons for Inflation Demand-Pull Inflation Demand-Pull Inflation: Too much money chasing too few goods is common cause for inflation- PULLS UP the price level (affects demand curve- show graphically) Cost Push Inflation Cost Push Inflation: a rise in production costs can also lead to a rise in inflation- PUSHES UP the price level (affects the supply curve- show graphically) International lending, federal taxes, and war are also leading causes of inflation.

6. Tracking Inflation: How Fast Are Prices Rising?Tracking Inflation: How Fast Are Prices Rising? (click title for video link) News Report PBS News Hour – Air date- May 13, 2011 1.How does MIT track rising prices? How does the government (BLS)? 2.How does inflation affect people? In particular the unemployed and retired? 3.What has been happening to prices in the U.S. since 2008? Why are economists not too concerned (what is core inflation?) and why isn’t the Fed too concerned?

7. Inflation CalculatorInflation Calculator (click title for link) Inflation, although it is a normal, usually unnoticeable part of our daily lives, its effects over the long term can be shocking. – From 1987 to 2007, inflation was not particularly high by historic standards, prices rose 82%. – It cost almost twice as much in 2007 to buy the same item you might have bought in 1987. For instance, a nice family car may have cost $20,000 in 1987; in 2007 the same car would have cost $36,400.

8. Inflation can start here… Inflation gets to be too much and a contraction occurs…

9. ZimbabweZimbabwe (click for link) Hyperinflation: Identified as abnormal inflation in excess of 500 percent per year

10. Deflation: Identified as continuously falling prices for well over a year and is not a decrease price in one or a few goods This leads to lower wages!

11. Hurt or Helped? In general, economists prefer that prices neither rise nor fall too quickly; they instead prefer to see prices remain steady over time. If inflation is higher than expected, who benefits and who loses? – Winners: people who agreed to buy at that price – Losers: people that agreed to sell at that price If inflation is lower than expected, who benefits and who loses? – Winners: people that agreed to sell at that price – Losers: people who agreed to buy at that price