Inflation

							Inflation
 Inflation: general increase in prices
 Purchasing power: ability to purchase
  goods and services
 Price Index: measurement that shows
  how avg. price of a group of goods
  changes over time.
 Market Basket: representative collection
  of goods and services
 Consumer Price Index: focuses on
  consumers –see price index definition
Value of a house

 Bought for 12,000
 Now worth 150,000
 Rise in value 1,100%
 Over the years prices rise and fall
 Inflation reduces purchasing power
     12,000 can buy much less now
 Inflation rate: Percentage rate of
  change in price level over time

 Hyperinflation: inflation that is out
  control
 Determining CPI: updated cost
                                     X 100
                  Base period cost


 Example:
Types of Inflation

 Wage: (demand-pull or excess demand
  inflation)- when total demand for goods and
  services in an economy exceeds the supply- S
  P
 Cost-Push: increase in the cost of production of
  goods and services = increase in the prices of
  finished goods and services
      (wages of laborers up = raise the unit costs of
       production = rise in prices for the product.. may or
       may not occur in conjunction with demand-pull
       inflation )
Types of inflation Cont

 Pricing Power: businesses and
  industries increase prices to increase
  their profit margins. (oligopolistic
  inflation)
 Sectoral: increase in the price of the
  goods and services produced by a
  certain sector of industries
     an increase in the cost of crude oil would
      directly affect all the other sectors, which
      are directly related to the oil industry
CONT…

 Fiscal Inflation: Fiscal Inflation occurs when
  there is excess government spending
 Hyperinflation: Hyperinflation (runaway
  inflation or galloping inflation) occurs during or
  soon after a war.
      Can lead to the complete breakdown of a country’s
       monetary system, but is short-lived.
      In 1923, in Germany, inflation rate touched
       approximately 322 percent per month with October
       being the month of highest inflation