economic challenges: inflation
TRANSCRIPT
Economic ChallengesInflation and Poverty
Economics and You…
At first, the changes are hardly noticeable.
You pay more for lunch at your favorite eatery.
Your personal grooming products are more expensive.
Clothing prices are higher.
A ticket for the movies costs two dollars more.
What can YOU think of that was cheaper “back in the day”?
You cannot escape rising prices…
Economics believe that
The money supply,
Changes in demand,
And increased production costs
All contribute to a rise in prices throughout the economy.
The Effects of Rising Prices
Inflation is a general increase in prices across an economy.
Purchasing Power is the ability to purchase goods and services.
Essentially, as inflation causes prices to rise, the purchasing power of money declines.
This is why $12,000 buys much less than it did 50 years ago.
Price Indexes
How do economists compare the changes in all these prices in order to measure inflation?
By comparing Price Levels.
To help calculate price levels, economics use the price index.
Price Index is a measurement that shows how the average price of a standard group of goods changes over time.
Using Price Indexes
Price Indexes help consumers and businesspeople make economic decisions.
The government also uses indexes in making policy decisions.
A member of congress may push for an increase in the minimum wage if she thinks inflation has reduced purchasing power.
The Consumer Price Index
The Consumer Price Index (CPI) is computed each month by the Bureau of Labor and Statistics (BLS).
CPI is determined by measuring the price of a standard group of goods meant to represent the “market basket” of a typical urban consumer.
A Market Basket is a representative collection of goods and services.
By looking at CPI, consumers, businesses, and the government can compare the cost of a group
of goods this month with what the same group cost in the past.
CPI Market Basket ItemsCategory Examples
Food and Drinks Cereals, coffee, chicken, milk, restaurants meals
Housing Rent, homeowners’ costs, fuel costs
Apparel and upkeep Men’s shirts, women’s dresses, jewelry
Transportation Airfares, new and used cars, gasoline, insurance
Medical Care Prescription medicines, eye care, physician’s services
Entertainment Newspapers, toys, musical instruments
Education/Communi-cation
Tuition, postage, musical services, computers
Other goods/services Haircuts, cosmetics, bank fees
The CPI market basket
helps economists
calculate the average
inflation rate for the
country.
The Market Basket is divided into eight categories of goods and services.
About every ten years, the items in the market basket are updates to account for shifting consumer buying habits.
The BLS determines how the market basket should change by conducting a Consumer Expenditure Survey.
Types of Inflation
When the inflation rate is low – between 1 and 3 percent – it does not typically cause problems for the economy.
When the inflation rate exceeds 5, the inflation rate itself becomes unstable and unpredictable.
The Core Inflation Rate is the rate of inflation excluding the effects of food and energy prices.
The worst kind of inflation is hyperinflation, or inflation that is out of control.
Causes of Inflation
Price levels can rise steeply when demand for goods and services exceeds the supply available at current prices.
Some causes include:
The growth of the money supply
Changes in aggregate demand
Changes in aggregate supply
The growth of the money supply
The quantity theory of inflation states that too much money in the economy causes inflation.
Changes in aggregate demand
Inflation can occur when demand for goods and services exceeds existing supplies.
Changes in aggregate supply
Inflation can occur when producers raise prices in order to meet increased costs.
Higher prices for raw materials can cause costs to increase.
Wage-Price Scale
Effects of Inflation It is hard to plan for the future!
Effects on purchasing power:
The dollar will not buy the same amount of goods as it has in years past.
Effects on Income
If worker’ wages do not increase as much as inflation does, they are in a bad economic situation.
Effects on Interest Rates
True return on the amount of interest depends on the rate of inflation.
