InflationHow much was a candy bar in 1960?How much is a candy bar now?
InflationDefinition – Unstable prices, prices tend to increasefaster then wagesInflation can be an indicator of the state ...
Price IndexesPrice Index – measurement that shows how theaverage price of a group of goods changes over timeConsumer Price...
InflationPrices that fit into 5 Categories:3.Creeping: 1% - 3%5.Normal: 3% - 10%7.Double Digit: 10% - 100%9.Galloping: 100...
Causes and Types of Inflation• Demand-Pull – excessive demand for an item pushes up the  price Examples: Cabbage Patch Kid...
Deflation and StagflationDeflation – a surplus labor and products cause the value of these items to dropStagflation – time...
Who is Hurt by Inflation?1. Retirees – most live on a fixed income (if   prices increase, the same fixed amount of   money...
Who is Helped by Inflation?1. Borrowers – pay back outstanding loans   with money worth more then originally   borrowed3. ...
Destabilization Effects of Inflation •   Changes in Consumer Spending: people are     discourage from buying cars, homes, ...
Inflation
Inflation
Inflation
Inflation
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Inflation

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Inflation

  1. 1. InflationHow much was a candy bar in 1960?How much is a candy bar now?
  2. 2. InflationDefinition – Unstable prices, prices tend to increasefaster then wagesInflation can be an indicator of the state of theoverall economyHigh inflation indicates the economy is stressed andcontracting (slowing down)Low inflation indicates low consumer confidenceand low consumer demand
  3. 3. Price IndexesPrice Index – measurement that shows how theaverage price of a group of goods changes over timeConsumer Price Index (CPI)CPI is computed each month by the Bureau of LaborStatisticsDetermined by measuring the price of a standardgroup of goods that represents the market basket of atypical consumerMarket Basket – representative collection of goodsand services
  4. 4. InflationPrices that fit into 5 Categories:3.Creeping: 1% - 3%5.Normal: 3% - 10%7.Double Digit: 10% - 100%9.Galloping: 100% - 500%11.Hyper-inflation: 500% +The US has experienced inflation as high as 15-20%(1970’s)
  5. 5. Causes and Types of Inflation• Demand-Pull – excessive demand for an item pushes up the price Examples: Cabbage Patch Kids, Tickle-Me Elmo• Cost-Push – the cost of a production factor (land, labor, capital) pushes up the price Example: High oil prices causes the price of many goods and services to go up3. Government Deficit – heavy government borrowing will increase interest rates4. Wage-Price Spiral – one group’s price and wages have a domino effect on other group’s prices and wages (up or down)5. Excessive Monetary Growth – overprinting of currency and too much currency in circulation
  6. 6. Deflation and StagflationDeflation – a surplus labor and products cause the value of these items to dropStagflation – time period of slow economic growth characterized by high unemployment and inflation at the same time
  7. 7. Who is Hurt by Inflation?1. Retirees – most live on a fixed income (if prices increase, the same fixed amount of money will not buy as many goods or services)3. Banks and Lenders – get paid back with money that is worth less (cheaper dollars)5. Consumers – wages will no longer buy the same amount of goods and services
  8. 8. Who is Helped by Inflation?1. Borrowers – pay back outstanding loans with money worth more then originally borrowed3. Investors and Speculators – money invested in stocks and bonds is worth more as prices rise5. Real Estate – homeowners see their property values increase (Increases Equity)
  9. 9. Destabilization Effects of Inflation • Changes in Consumer Spending: people are discourage from buying cars, homes, etc. • Stores cannot afford to keep shelves as full as before: shrinking inventory causes plant closings and layoffs • Inflation leads to Speculation: diamonds, gold, artwork and other collectibles can be helped by inflation • Inflation hurts creditors: repaid in cheaper dollars • Inflation causes a decline in the value of money: $1 in 1900 = 2 cents today

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