1. Inflation Agec 217, Summer 2007

2. Inflation Top Box Office Movies of All Time: http://movies.yahoo.com/mv/boxoffice/alltime/ Gone with the Wind (1939): ranked 77 th – Tickets in 1939$0.23 – Tickets in 2007$6.58

3. Inflation Inflation: An increase in the overall level of prices in the economy Inflation Rate: The percentage change in prices from the preceding period

4. Historical Inflation

5. Inflation Your rent under 20% inflation during four years at Purdue – Year 1: $ 500 / month – Year 2: $ 600 / month – Year 3: $ 720 / month – Year 4: $ 864 / month – Year 5: $1,037 / month Rent doubles in 4 years (year 5 – year 1)

6. Inflation What if prices increase dramatically and wages do not keep up Hyperinflation: out of control inflation, often above the 20% - 30% range

7. Inflation Mexican Peso – 1993: Nuevo Peso = 1,000 Pesos – 1996: Dropped the “Nuevo Term” Essentially devalued the Peso multiple of 1,000

8. Inflation Hungary after WWII – July, 1946 (Pengo) Inflation Rate 41,900,000,000,000,000% Prices doubled every 15 hours Forint: August, 1946 – 400 octillion Pengo

9. Inflation Top Box Office Movies of All Time – (adjusted for inflation): http://www.boxofficemojo.com/alltime/adjusted.htm Gone with the Wind (1939): now ranked 1 st – Tickets in 1939$0.23 – Tickets in 2007$6.58

10. Inflation Issues with GDP Deflator for Inflation – Measure what is produced domestically, not what consumers actually buy Imports consumed but not produced here Government and Investment produced here but not consumed – Current products disappear and new products appear

11. Consumer Price Index Measures a “basket” of goods as purchased by the typical consumer – Only addresses the first problem of GDP deflator – Still issue with changing baskets over time

12. CPI Data Collection Bureau of Labor Statistics - http://www.bls.gov/cpi http://www.bls.gov/cpi -Current CPI: 2001 and 2002 -10,000 families interviewed each quarter - 7,500 families tracked habits for two weeks -Only looks at average urban consumers (87% of population)

13. CPI Components FOOD AND BEVERAGES HOUSING APPAREL TRANSPORTATION MEDICAL CARE RECREATION EDUCATION AND COMMUNICATION OTHER GOODS AND SERVICES GOVERNMENT FEES FOR SERVICES TAXES PAID WITH PURCHASE OF OTHER GOODS

14. CPI Measured After surveying consumers, the Bureau of Labor Statistics determines the following diets and prices: – 2005: 500 pizza slices and 300 sodas Prices: pizza = $1.00 and soda = $0.50 – 2006: 550 pizza slices and 330 sodas Prices: pizza = $1.10 and soda = $1.00

15. CPI Measured The Bureau of Labor Statistics determines a typical consumer basket based on survey data: – Let’s say the consumer basket is 525 pizza slices and 315 sodas

16. CPI Measured Price of the consumer’s basket – 2005 525 * $1.00 + 315 * $0.50 = $682.50 – 2006 525 * $1.10 + 315 * $1.00 = $895.50 – Percent change = 31.2% inflation

17. CPI Measured Consumer Price Index (base year = 2005) – Calculation (Basket Price / Basket Price for base year) * 100 – 2005 ($682.5 / 682.5) * 100 = 100 – 2006 ($895.5/ 682.5) * 100 = 131

18. Using CPI Calculate Inflation from CPI (all CPI’s must be based on the same base year) – Calculation ((CPI current year/CPI previous year) – 1) * 100 – 2006 ((131 / 100) – 1) * 100 = 31% inflation

19. CPI Issues What if the basket changes? Computers and comparable products over time VCR’s and price inflation

20. Historical CPI and GDP deflator

21. Summary CPI is different than the GDP deflator in that is measures what consumers actually use, as opposed to what is produced domestically. While there are some drawbacks, it is the most widely used measure of inflation.