Standard SSEMA1C- Calculate inflation rate SSEMA1B- Define inflation and stagflation SSEMA1C- Calculate inflation rate

Inflation Inflation is an economic instability that deals with changes in the level of prices Inflation is the rise in the general level of price

Purchasing Power Purchasing power—the ability to purchase goods & services. It measures how far your dollar goes As prices rise, purchasing power declines.

Example A $10 million bill from Zimbabwe… Worth approximately 25 cents in US currency.

Degrees of Inflation Hyperinflation 500% or above Galloping Inflation 100%-300% Creeping Inflation 1%-3%

How do we measure inflation? In order to measure inflation you need to start with a price level. A price level is the relative magnitude of prices at one point in time. - CPI

Consumer Price Index CPI measures the average price on about 80,000 most commonly bought goods and services. By looking at changes in CPI over time, economist use it to calculate inflation rates.

Who measures it? Consumer Price Index is computed each month by the Bureau of Labor Statistics. Yearly they evaluate the number of goods and services that are calculated in it. They measure it by the price of a typical basket of goods and services from one year to another

Current CPI (from bls.gov)

Excessive Monetary Growth Causes of Inflation Causes of Inflation Demand- Pull Theory Cost-Push Theory Federal Gov’t Deficit Excessive Monetary Growth

Causes of Inflation Demand- Pull theory: States that inflation occurs when demand for goods and services exceeds supplies. Cost – Push Theory: Inflation occurs when producers raise prices to meet increased costs.

Consequences of Inflation 1. The dollar buys less 2. People change spending habits 3. People speculate heavily about higher prices 4. Alters the distribution of income 5. Inflation exceeds wages

COLA Cost of Living Adjustment: An increase in your wage that matches the increase in inflation.

Deflation Deflation is a decrease in the general level of prices

Stagflation A period of stagnant growth combined with inflation Symptoms of stagflation are Falling GDP combined with Rising CPI