Macro #16: Inflation

What can you get for a dollar today?

I Want Candy!

•$1•$2•$5

I Want Candy!

•$1•$2•$5

I Want Candy!

•$1•$2•$5

• $10• $50• $100

Inflation • Increase in average

price level of all products

• Reduces one’s purchasing power: how much one can purchase w/ a set amount of $

• Good inflation is 2-3% per year

2 Causes of Inflation

1. Demand-Pull Inflation• Demand increases faster than production

causing prices to rise • Due to increase in money supply or use of

credit

2. Cost-Push Inflation

• Producers must raise prices in order to cover higher cost of resources – Crop failures, natural

disasters, higher wages

What has been happening to the price of gas? What type of inflation would this be?

Measuring Inflation

• Consumer Price Index (CPI): measures change in prices of goods over time– Uses a “market basket” a selection of

commonly purchased goods – It takes $9 today to purchase

what you could have bought

for a $1 in 1946

• We Americans love our Oreos![1922] 32 cents/lb

• [1932] 25 cents/lb

[1950] 34 cents/11 oz

• [1964] 39 cents/lb

• [1976] 99 cents/19 oz

[1981] 1.69/19 oz

[2008] 4.29/18 oz

Other types of Price Changes

• Deflation: decrease in prices– Sound good right? NO! prices reduce,

producers won’t make as much, won’t hire as many ppl

• Hyperinflation: huge increases in prices – Brazil now has relatively low inflation of

approx 7% BUT from 1980 – 2010 it was around 450% per year!

– How do you survive that kind of economy?

Effects of Inflation 1. Decreased purchasing power:

– A dollar just won’t get ya what it used to!

– Bad for those on fixed (set) incomes – retirees

– Good for those w/debt

Other effects …2. Decreased value of wages:

– If your wage is the same, but prices go up, you can buy less!

– COLA’s: cost of living adjustments

3. Decreased value of savings– If savings increases by 1% per year, but

prices go up 2% per year – you’re losing $$$!

How would inflation effect….

A. A person saving up to buy a home

B. A retired auto worker

C. A retail salesperson who has not received a raise in 3 years

D. A person with a high mortgage.