Inflation  Inflation is a process of rising prices.  The inflation rate is measured as a percentage change in the average level of prices or the price.

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Presentation transcript:

Inflation  Inflation is a process of rising prices.  The inflation rate is measured as a percentage change in the average level of prices or the price level.  Consumer Price Index (CPI)  Deflation is negative inflation, the price level is falling.

Inflation  In December 1995, the CPI was and in December 1996 it was How would the inflation rate for 1996 be calculated?

Inflation  The inflation rate for 1996 was: Inflation = – = 3.3%  100

Inflation in the United States

Inflation Around the World

Is Inflation a Problem?  Predictability of inflation rates creates problems  High, unpredictable inflation causes resources to be diverted to predicting inflation rates.  This is a wasteful use of resources

Is Inflation a Problem?  Hyperinflation  Inflation in excess of 50% per month  Workers are paid daily Money loses value rapidly Workers spend their incomes quickly  1994 Zaire — 76% per month Brazil — 40% per month

Is Inflation a Problem?  Policies that reduce the inflation rate increase the unemployment rate.

Inflation  Inflation is a steady increase in the average price level.  The rate of change of the average price level is called the inflation rate.  We use a price index (often the Consumer Price Index — the CPI) to measure the average level of prices as well as how fast it is changing.

Calculating the Inflation Rate  In December, 1992, the CPI was  In December, 1993, it was  The inflation rate was [( )/141.9] x 100 = 2.7%

Inflation in the United States  Since 1960, the worst inflation was in the mid-1970’s and 1982, hitting peak annual rates of 12% and 14% during those years.  Reacting to the inflation of , Federal Reserve Board Chairman Paul Volcker implemented a monetary policy designed to control inflation.

Inflation, Deflation, and Disinflation  If the price level is rising there is inflation.  If the price level is falling there is deflation.  During a period of disinflation the inflation rate is falling. The price level is still rising, but at a slower rate.

Inflation Around the World  There has been less inflation in the U.S. and other developed countries than in developing countries.  The most extreme inflation since 1970 occurred in Latin America where, in 1990, the inflation rate approached 600 percent per year.

Why Is Inflation a Problem?  Inflation is a problem because it makes the economy behave like a giant casino in which some people gain, others lose, and no one can predict who will be in each group. adds friction to the flow of credit.  Gains and losses occur because of unpredictable changes in the value of money.  Will see this clearly in Lecture 24.

The Problem of Rapid Inflation  In a rapid inflation, resources are diverted from productive activities to more accurately forecasting the inflation rate.  Forecasting inflation is socially unproductive.

Hyperinflation  When the inflation rate exceeds 50 percent per month, hyperinflation is occurring.  Germany, Poland, and Hungary experienced hyperinflations in the 1920s.  Brazil and Zaire had hyperinflation in 1994.