This document discusses concepts related to inflation, consumer price indexes, and economic bubbles. It defines purchasing power and explains that a consumer price index is used to track price changes over time for a basket of goods. The document distinguishes between nominal and real prices and how they are adjusted for inflation. It also notes that consumer price indexes may not always account for new products or quality changes. Inflation and its causes, including demand-pull inflation and cost-push inflation, are defined. The document concludes by defining economic bubbles as surges in asset prices above fundamental value, often fueled by speculation.

1. Inflation and Bubbles and Tulips
Purchasing power - the amount of physical goods and services that can
be bought by a given amount of money.
a . Consumer price index (CPI) - a statistical estimate constructed using
the prices of a sample of representative items whose prices are
collected periodically.
b. "Real" means that prices from the past has been adjusted for
inflation. Nominal means a price from the past that hasn't been
adjusted for inflation. So the highest "nominal" box office receipts list is
quite different.
c. Since we have to keep the market basket constant over time, a
traditional CPI won't adjust for either new products or increases in
product quality.
Inflation - an increase in a currency supply relative to the number of
people using it, resulting in rising prices of goods and services over
time. a. Demand pull inflation - too much money chasing too few
goods.
Bubbles - a market phenomenon characterized by surges in asset prices
to levels significantly above the fundamental value of that asset. a.
Speculation - trading a financial instrument involving high risk, in
expectation of significant returns.
Cost Push Inlation - increasing prices of goods and services leads to a
decreased supply.