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INFLATION
INFLATION: 
A general and ongoing rise in the 
level of prices in an economy.
AVERAGE PRICE OF MILK IN THE USA: 
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 market… but in MOST markets. 
It does mean that pressure for price 
increases reaches across most markets, 
not only one.
INFLATION: 
Unlike the price changes we saw with the 
supply & demand models, price changes 
due to inflation are not a one 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 is rising, and, 
subsequently, purchasing power is falling. 
inflation rate (%)
INFLATION RATE: 
The rate at which the general level of 
prices for goods and services is rising, 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 for calculation 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 
the inflation rate for that period.
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. 
Observing change in the CPI is the most 
common way to generate an inflation rate.
CONSUMER PRICE INDEX 
(CPI): What’s in the “basket”?
CONSUMER PRICE INDEX 
(CPI): 
Make a list of 5 cities you think 
you might like to live in.
CONSUMER PRICE INDEX 
(CPI): 
Compare CPI in the cities you selected. A 
higher CPI number indicates that goods 
and services cost more in that location. 
(Link can be found below slides )
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 
they could 
in the past. Inflation
BUT INFLATION IS GOOD… 
…because a small amount of inflation is a 
sign that the economy is growing. Typically, 
growing nations try to maintain a steady 
inflation rate of 2% per year.
A COMMON PROBLEM IS… 
…when wages don’t rise at the same 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 doctor in Tokyo (an 
expensive city) will have a 
higher wage than a doctor in 
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 
negative inflation rate). 
Increases above 0% 
(inflation) 
Decreases below 0% 
(deflation)
DEFLATION 
To an Economist, Deflation is worse than 
Inflation (as long as that Inflation 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 fun!”
Famous examples of hyperinflation… 
In Germany, 1922, a period of severe hyperinflation 
began. There were a few causes: namely, the German 
government had printed an excessive amount of 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.

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Inflation

  • 2. INFLATION: A general and ongoing rise in the level of prices in an economy.
  • 3. AVERAGE PRICE OF MILK IN THE USA: 4.50 4.00 3.50 3.00 2.50 2.00 1.50 .50 0 1950 1960 1970 1980 1990 2000 2010 Today
  • 4. INFLATION: Inflation does not mean that all prices rise the same amount. Not just in one market… but in MOST markets. It does mean that pressure for price increases reaches across most markets, not only one.
  • 5. INFLATION: Unlike the price changes we saw with the supply & demand models, price changes due to inflation are not a one time event. If inflation happened for one year and then stopped, it wouldn’t be called inflation any more.
  • 6. INFLATION RATE: The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. inflation rate (%)
  • 7. INFLATION RATE: The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. inflation rate (%)
  • 8. 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 for calculation how price level changes over time.
  • 9. 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 the inflation rate for that period.
  • 10. 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. Observing change in the CPI is the most common way to generate an inflation rate.
  • 11. CONSUMER PRICE INDEX (CPI): What’s in the “basket”?
  • 12. CONSUMER PRICE INDEX (CPI): Make a list of 5 cities you think you might like to live in.
  • 13. CONSUMER PRICE INDEX (CPI): Compare CPI in the cities you selected. A higher CPI number indicates that goods and services cost more in that location. (Link can be found below slides )
  • 14. 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 they could in the past. Inflation
  • 15. BUT INFLATION IS GOOD… …because a small amount of inflation is a sign that the economy is growing. Typically, growing nations try to maintain a steady inflation rate of 2% per year.
  • 16. A COMMON PROBLEM IS… …when wages don’t rise at the same 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 doctor in Tokyo (an expensive city) will have a higher wage than a doctor in Lansing (my tiny hometown).
  • 17. DEFLATION A decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Increases above 0% (inflation) Decreases below 0% (deflation)
  • 18. DEFLATION To an Economist, Deflation is worse than Inflation (as long as that Inflation isn't too high!). Deflation causes falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals.
  • 19. 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 fun!”
  • 20. Famous examples of hyperinflation… In Germany, 1922, a period of severe hyperinflation began. There were a few causes: namely, the German government had printed an excessive amount of new bills, and reparations placed on Germany after losing WW1 caused the German currency to lose its value against other currencies.
  • 21. 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.