This document discusses inflation and how it is measured. It provides definitions for key terms like inflation, purchasing power, and price index. It explains that a rise in demand, production costs, and prices across the economy can all contribute to inflation over time. The price index and consumer price index (CPI) are used to track average price levels and calculate the inflation rate by comparing costs of goods and services in a market basket over time. The CPI helps economists measure core inflation rates for a country.

2. You cannot escape rising prices…

3. Changes in demand,
And increased production costs
All contribute to a rise in prices
throughout the economy.

4.  Inflation
 Purchasing Power
This is why $12,000 buys much less than it did
50 years ago.

5. 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.

7. Consumer Price Index (CPI)
Market Basket

8. Category 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
The CPI market Medical Care Prescription medicines, eye care,
basket helps physician’s services
economists Entertainment Newspapers, toys, musical
calculate the instruments
average Education/Communi- Tuition, postage, musical
inflation rate services, computers
cation
for the
country. Other goods/services Haircuts, cosmetics, bank fees

9. Consumer
Expenditure Survey.

10. Core Inflation Rate
hyperinflation

12.  The quantity theory of inflation states that too
much money in the economy causes inflation.
 Inflation can occur when demand for goods and
services exceeds existing supplies.
 Inflation can occur when producers raise prices in
order to meet increased costs.
 Higher prices for raw materials can cause
costs to increase.