1. Inflation *

2. Inflation During the Great Depression;
What economic data might you use to explain what you see in the photograph?
What does this image reveal about prices and wages from ?
What is happening in this photograph?
A New York City restaurant offers bargain prices to attract customers. *

3. INFLATION: An increase in the average price level of goods and services produced in an economy.*

4. How is inflation calculated?
By using the Consumer Price Index (CPI)!
400 goods and services are calculated in the “Market Basket”
Each group of items is weighted to reflect how much consumers spend on it
Re-calculated yearly to find the difference
Growth of the price index = inflation! *

5. Normal:
A certain amount of inflation is normal and expected.
The normal (“creeping”) rate of inflation is 3.4% per year.
Abnormal:
HYPERINFLATION: Inflation goes into overdrive!
Germany in the 1920’s (Loaf of bread: 1 mark in 1920, 2 billion marks in 1923)
Zimbabwe, 2008 (1000%)
DEFLATION: Prices go down over time
Good for consumers, savers, & lenders
Bad for borrowers & businesses *

6. What causes inflation? Quantity Theory: Too much money circulating!!!;
Quantity Theory:
Too much money circulating!!!
Demand-Pull Theory:
Demand for goods exceeds supply & causes a shortage…“Pulls” prices upwards
Cost-Push Theory:
Costs of production increase, so prices are “pushed” upwards
Result of the Wage-Price Spiral *

7. Wage-Price Spiral:
A vicious cycle in which rising prices drive up wages and then rising wages drive up prices. The result is an inflationary spiral that can be hard to break. *

8. Biggest losers!!! (People most hurt by inflation)
People on a fixed income
Retired
As Inflation ↑, Purchasing Power ↓ *

9. Biggest WINNERs!!! (People least affected by inflation)
Borrowers
(paying back loans with devalued money)
Homeowners
As inflation ↑, these people see their “wealth” increase! *

10. Let’s practice looking at some data…
What might explain the fluctuations between 1933 and 1940?
Based on what you know about the inflation rate and how it’s determined, what might explain the deflation before 1933?
During which of these years was the inflation rate the lowest? The highest?
What might explain the increase in inflation after 1940? *

11. Based on these data, what generalizations can you make about the health of the U.S. economy during the Great Depression?
How do the inflation rate data help to explain what you see in the photograph? *