1. Inflation
Part I

2. What is inflation?
a slow and steady rise in the general price level of goods & services or decrease in one’s purchasing power.
We know that the prices of goods & services rise each year
Movie in 1981= $2.50
Movie in 2017= $10.00

3. How is inflation measured?
Consumer Price Index (CPI): def- the measure of changes in the price of goods and serviced commonly purchased by consumers.
Steps to create the index:
1. US gov’t surveys thousands of people across the country to find out what goods and services they buy on a regular basis.
2. The government creates a “market basket” of about 400 different goods/services purchased by typical households.
Food & Bev, Housing, Clothes, Transportation, Medical Care, Recreation, Education & Communication, Other

4. 3. The basket is adjusted to account for how much of household budget goes to purchase each type of item. Ex: if families spend more money on food than on lawn care, the market basket is balanced to reflect this.
4. Gov’t workers research the current prices of the items in the market basket.
End: What consumers spend to fill the basket can then be compared to prices in other years.

5. Producer Price Index (PPI): def- a measure of changes in wholesale prices.
PPI is constructed in the same way as CPI, but it reflects the prices producers receive for their goods rather than the prices consumers pay. Producers have to pay additional fees like sales taxes or shipping charges.
Producers tend to encounter inflation before consumers, so PPI tends to lead CPI as an indicator of inflation.

6. Rates between 1-3% are moderate/standard
Types of Inflation
The different types are defined according to the degree of level of the inflation rate.
Rates between 1-3% are moderate/standard
3% and up is galloping inflation.
If it gets out of hand, the result is hyperinflation: a rapid, uncontrolled rate of inflation in excess of 50% per month.
Germany post WWI

7. Causes of Inflation- Two Different Kinds
Demand-Pull Inflation: def- results when total demand is rising faster than the production of goods/services.
Total demand rises faster than production, this creates a scarcity that then drives up prices.
When demand doesn’t meet supply  prices increase.
It takes time for producers to recognize a rise in demand and prepare for higher production. Until producers can match consumer demand, there is a scarcity and price will increase.
Consumers demand more of a product  producers are slow to respond  Prices will rise

8. The US gov’t controls money through the Federal Reserve Bank
The US gov’t controls money through the Federal Reserve Bank. If the gov’t creates too much money during the lag period before the increase in production can match consumer demand, there will be too much money chasing too few goods, and prices will rise.
Gov’t creates more money  consumers have more money to spend  prices rise
The creation of excess money is the main reason for demand-pull inflation.
IT DOES NOT SOLVE THE PROBLEM

9. Cost-Push Inflation: def- prices are pushed upward by rising production costs.
When production costs increase, it creates less of a profit. If consumer demand is strong, producers may raise their prices in order to maintain their profits.
Supply shocks: def- sharp increases in prices of raw materials or energy. Ex: & 1974 members of OPEC limited the amount of oil they sold to the US, which caused prices to increase. This rapid rise in the price of oil led to cost-push inflation.
Wage-Price Spiral: Workers receive a wage increase  the wage increase drives up the production costs  higher prices  workers demand a wage increase to pay for higher prices.