Inflation…. (Silent Robber)

Inflation:

• Define:– A sustained rise in the level of prices generally

or a sustained fall in purchasing power of $

Measurements – Limitations (CPI)

CPI: Consumer Price Index

• Measures the changes in the price of goods and services commonly purchased by consumers.

• -They survey → what do people buy?

• -"Market basket" of products– 200 items of different prices in different regions of the

country.• Housing, fuel, utilities, food, transportation, health care,

apparel and upkeep, entertainment, misc.

Components of CPI

Food and Beverages

18%

Other Services7%

Nondurables11%

Apparel6%

Durables11%

Rent26%

Transportation7%

Household Services

9%

Medical5%

PPI: Producer Price Index

• Measures the changes in the wholesale prices

• PPI tend to lead the CPI as an IndicatorProducers pay first

Both are used for Inflation Rate

• Rater of change in prices over a set period of time

• Types of Inflation:

Hyperinflation:

• Rapid, uncontrolled rate of inflation in excess of 50% per month.

Deflation:

• a decrease in the general price level

Demand-pull:

• rises when total demand rises faster than production of goods and services

Cost-Push Inflation:

• when increases in costs of production push prices up

Wage-Price spiral:

• cycle that begins w/ increased wages, which leads to increased production costs, causes increased prices, which results in demand for even higher wages.

Impacts of Inflation:

– Decrease value of $

• Loans, borrowers, senior citizens

– Increase interest rates

• Banks and lending respond b/c want to make $

– Decrease return on savings

• Discourage saving b/c purchasing power decreases

Inflation

GDP

Time

Unemployment

Unemployment Inflation

$