INFLATIO

N
 INFLATION:
A general and ongoing rise in
the level of pricesin an
economy.
 AVERAGE PRICE OFMILK
4.50
4.00
3.50
3.00
2.50
2.00
1.50
.50
0
1950 1960 1970 1980 1990 2000 2010
Today
 INFLATION:
Inflation does not mean that
all prices rise the same
amount.
Not just in one but in MOST
market… markets.
Itdoes mean that pressure forprice
increases reaches acrossmost markets,
not onlyone.
 INFLATION:
Unlike the price changes we saw with the
supply& demandmodels, pricechanges
due to inflation are not aone time event.
If inflation happened for one year
and then stopped, it wouldn’t be
called inflation any more.
 INFLATION RATE:
The rate at which the general
level of prices for goods and
services isrising, and,
subsequently, purchasing power is falling.
inflation rate
(%)
 INFLATION RATE:
The rate at which the general
level of prices for goods and
services isrising, and,
subsequently, purchasing power is falling.
inflation rate
(%)
 BASKET OF GOODS &
SERVICES:
To calculate the inflation rate,
economists look at a “basket of goods
and services.” This is a hypothetical
group of different items, with specified
quantities of each one, used as a
basis forcalculation how price level
changes over time.
 BASKET OF GOODS &
SERVICES:
When conceptualizing a basket of goods, it
is best to imagine a shopping
basket.The basket contains everyday
products such as food, clothing, furniture
and financial services. As the products
in the basket increase or decrease in price,
the overall value of the basket changes.
The value of the basket each year determines
CONSUMER PRICE INDEX
(CPI):
The “basket of goods and
services” is used to calculate
a
consumer price index. CPI
shows us how expensive
goods and services are in a
selected area.
CONSUMER PRICE INDEX
(CPI): ke”
t ?
“bas
n
i the
What’s
CONSUMER PRICE INDEX
(CPI):
Make a list of 5 cities you
think you might like to
live in.
INFLATION IS
HARMFUL…
…because as inflation rates go up, the
purchasing power of our money goes
down. This means consumers can
buy less
with their
money than
inthey
thecould Inflation

past.
BUT INFLATION IS G O O D …
…because a small amountof inflation is
a sign that the economy is growing.
Typically, growingnations tryto maintain a
steady inflation rate of 2% per year.
 A COMMON PROBLEM
IS… wages don’t rise at the same
…when
rate inflation is rising at.
Normally, in locations with
expensive goods, average
wages of employees are high
enough to purchase those
goods. For example, a doctorin
Tokyo (an expensive city) will
have a higher
wage than a doctorin Lansing
(my tiny hometown).
 DEFLATION
A decrease in the general price level of
goods and services. Deflation occurs
when the inflation rate falls below 0% (a
Increases above 0%
negative inflation rate).
(inflation)

Decreases below 0%
(deflation)
 DEFLATION
To an Economist, Deflation is worse
than Inflation (as longas thatInflation
isn't too high!). Deflation causes falling
profits, closing factories, shrinking
employment and incomes, and
increasing defaults on loans by
companies and individuals.
 HYPERINFLATION
Hyperinflation occurs when a
country experiences very high and
usually accelerating rates of inflation,
rapidly eroding the value of the
local currency.

“Hyperinflation makes grocery shopping barrels of

Famous examples of hyperinflation…
InGermany, 1922, aperiod of severe hyperinflation
began.There were a few causes: namely, the
German government hadprinted an excessive
amountof new bills, and reparations placed on
Germany after losing WW1 caused the German
currency to lose its value against other
currencies.
Famous examples of hyperinflation…
In Zimbabwe, 2008, there was a land-reform
policy that took property from white
landowners to redistribute to the public.The
government instability that followed caused
people to lose faith in the value of the
currency, and rapid inflation took place.