Inflation

Inflation concepts: Explain the difference between general price rises and a price rise in a particular market

Distinguish between inflation, deflation, and disinflation

Inflation Statistics: Construct a simple weighted price index

List and explain the limitations of the Consumer Price Index (CPI) Describe alternative measures of changes in the price level such as the Producers Price Index (PPI)

NZ Inflation rates in graph form…

What is the trend over time?

Before we go into the history of inflation in NZ Ponder this…….

If the price of butter rose by 4c per 500g block, would that be inflation?

If the price of petrol and oil rose by 3c a litre would that be inflation?

What about the situation where the average price of all fruit and vegetables rose by four per cent?

What is Inflation

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Q’ Q

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Quantity

Price ($) Price

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Quantity Q Q’

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Decrease in Supply Increase in Demand

Just because some prices are rising does not necessarily mean inflation is occurring. These are relative price changes.

Markets are dynamic (constantly changing) because supply and demand conditions for different commodities (goods and services) are constantly changing.

If the supply of a commodity falls or the demand for a commodity rises, competition among buyers will force the price up.

Therefore some prices will rise relative to others.

Only when the general (average) price is rising or falling will we use the terms inflation or deflation.

However, the increase in price for some commodities can impact on many other prices. E.g. an increase in the price of fuel (i.e. diesel),

electricity, internet, etc.

A change in the General Price Level…

Definition: an increase in the general price level over a period of time.

Measured by: percentage increase in the Consumers Price Index (CPI).

Inflation reduces the purchasing power of money (cannot buy as much for the same amount in dollars).

What is inflation?

Think back? What is the consumer price index?

Measures changes in the price level of consumer goods and services purchased by households. It is a type of index that allows us to calculate the rate of inflation.

CPI ?

In 2000 this shopping trolley full of groceries cost $100

In 2009 this same trolley would cost $120

OR in 2009 for the same price of $100 you could only buy this amount.

$100

$100

$120

Deflation Disinflation A sustained decrease

in the general price level over a period of time.

The exact opposite of inflation.

Where the rate of inflation is decreasing (prices have still risen but by a smaller amount than the previous period)

(A special type of inflation)

http://en.wikipedia.org/wiki/Hyperinflation

Hyperinflation research project…