19/06/2023

Inflation
 A persistent increase in the average price level in the economy.
 It is measured by the inflation rate – the percentage change in the
INFLATION price level from one period to the next.
𝑷𝒓𝒊𝒄𝒆 𝒍𝒆𝒗𝒆𝒍𝒕 𝑷𝒓𝒊𝒄𝒆 𝒍𝒆𝒗𝒆𝒍𝒕 𝟏
Inflation Rate = x 100
𝑷𝒓𝒊𝒄𝒆 𝒍𝒆𝒗𝒆𝒍𝒕 𝟏
ECON 55: MACROECONOMICS
 Inflation is the most common phenomenon associated with the price
level. The price level is measured as the weighted average of the
goods and services in an economy. This is done by constructing price
indexes, which are averages of consumer or producer prices.
 Inflation is one of two key macroeconomic problems. The other is
unemployment.
Prepared by:
Jen Imee B. Dioneda
Instructor, Department of Economics

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Three Strains of Inflation Causes of Inflation

 Moderate Inflation (Creeping Inflation)
 This is characterized by prices that rise slowly and predictably. It is a single-digit
annual inflation rate (0-10 percent per year). When prices are relatively stable,
people trust money. They are willing to hold on to money because it will be
almost valuable in a month or a year as it is today.
 Galloping Inflation
 Inflation is in the double- or triple-digit range of 20, 100, or 200 percent a year.
Money losses its value very quickly, so people hold only the bare minimum
amount of money needed for daily transactions. People hoard goods, buy houses,
and never lend money at low nominal interest rates.
 Hyperinflation
 That is when prices are rising a million and even a trillion percent per year.
 Demand-pull Inflation
 This occurs when demand for a good or service rises, but supply stays the same.
Buyers become willing to pay more to satisfy their demand. Demand-pull
inflation can be accompanied by irrational exuberance.
 Cost-push Inflation
 It starts when the supply of goods or services is restricted for some reason, while
demand stays the same. When the supply of labor is not enough to meet demand,
it can create wage inflation.
 Overexpansion of the money supply
 That is when the glut of capital in the market chases too few opportunities. It’s
often a result of expansive fiscal or monetary policy, creating too much liquidity
in the form of dollars or credit.

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Inflation rate Kinds of Price Indexes

 The percentage change in the price level from one period to the
next.
 The inflation rate is most presented as an annual average, the
percentage change in the average price level from one year to
the next.
 The inflation rate is one of several key indicators of business-
cycle instability and the overall health of the macroeconomy,
with a primary focus on tracking the goal of price stability.
 While the inflation rate is generally positive, indicating
inflation, it also can be negative, indicating deflation (where
the general level of price is falling). Should a positive inflation
rate decline over time, then disinflation occurs.
Price indexes are measured by the general price level or the average
price of a number of goods and services.
 The two most common price indexes used to measure the price level
and the inflation rate are the Consumer Price Index (CPI) and
the GDP price deflator.
 Consumer Price Index (CPI) – measures the cost of buying a
standard basket of goods at different times. The market prices
include prices of food, clothing, shelter, fuels, transportation,
medical care; college tuition, and other goods and services
purchased from day-to-day living.
 GDP Deflator – is the ratio of nominal GDP to real GDP. It is the
price of all components of GDP, (Consumption, Investment,
Government purchases, and Net exports) rather than a single
sector.

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Measuring the Cost of Living: CPI Measuring Inflation rate

 The most used measure of the level of prices is the Consumer Price  It is measured by the inflation rate – the percentage change in the price level
Index (CPI). It begins by collecting the prices of thousands of goods from one period to the next.
and services. Just as GDP turns the quantities of many goods and Inflation Rate =
𝑷𝒓𝒊𝒄𝒆 𝒍𝒆𝒗𝒆𝒍𝒕 𝑷𝒓𝒊𝒄𝒆 𝒍𝒆𝒗𝒆𝒍𝒕 𝟏
x 100
𝑷𝒓𝒊𝒄𝒆 𝒍𝒆𝒗𝒆𝒍𝒕 𝟏
services into a single number measuring the value of production, the
CPI turns the prices of many goods and services into a single index
measuring the overall level of prices.
YEAR CPI EXAMPLE:
YEAR CPI 2010 100.0000 𝑪𝑷𝑰𝒕 𝑪𝑷𝑰𝒕 𝟏
2010 100.0000 2011 104.7180 Inflation Rate = x 100
𝑪𝑷𝑰𝒕 𝟏
2011 104.7180 2012 107.8880 𝑪𝑷𝑰𝟐𝟎𝟏𝟏 𝑪𝑷𝑰𝟐𝟎𝟏𝟎
2012 107.8880 Inflation Rate = x 100
2013 110.6750 𝑪𝑷𝑰𝟐𝟎𝟏𝟎
2013 110.6750 2014 114.6570 Inflation Rate =
𝟏𝟎𝟒.𝟕𝟏𝟖𝟎 𝟏𝟎𝟎
x 100
𝟏𝟎𝟎
2014 114.6570 2015 115.4300 𝟒.𝟕𝟏𝟖
2015 115.4300 Inflation Rate = x 100
2016 116.8770 𝟏𝟎𝟎
2016 116.8770 2017 120.2110 Inflation Rate = 𝟎. 𝟎𝟒𝟕𝟏𝟖 x 100
2017 120.2110 Table 1: Consumer Price Index, Philippines (2010 – 2017) Inflation Rate (2011) = 4.718%
Source: FRED Graph Observations
Table 1: Consumer Price Index, Philippines (2010 – 2017)
Source: FRED Graph Observations

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Activity: Measuring Inflation rate Next topic: Unemployment

 Using the given values of the Consumer Price Index (CPI) of the
Philippines from year 2010 to 2017, compute the inflation rate For your ASSIGNMENT, Answer the following questions: (to be
from 2012 to 2017. (Round off your answer to two decimal places submitted next meeting.)
and show your solutions.)  Explain the different laws pertaining to unemployment:
YEAR CPI a. Phillips Law
2010 100.0000 b. Okun’s Law
2011 104.7180  Differentiate the different types of unemployment and state an
2012 107.8880
2013 110.6750
example.
2014 114.6570
2015 115.4300
2016 116.8770
2017 120.2110
Table 1: Consumer Price Index, Philippines (2010 – 2017)
Source: FRED Graph Observations

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