1. Inflation
How much was a candy bar in 1960?
How much is a candy bar now?

2. Inflation
Definition – Unstable prices, prices tend to increase
faster then wages
Inflation can be an indicator of the state of the
overall economy
High inflation indicates the economy is stressed and
contracting (slowing down)
Low inflation indicates low consumer confidence
and low consumer demand

4. Price Indexes
Price Index – measurement that shows how the
average price of a group of goods changes over time
Consumer Price Index (CPI)
CPI is computed each month by the Bureau of Labor
Statistics
Determined by measuring the price of a standard
group of goods that represents the market basket of a
typical consumer
Market Basket – representative collection of goods
and services

5. Inflation
Prices 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)

7. 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 up
3. Government Deficit – heavy government borrowing will
increase interest rates
4. 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

9. Deflation and Stagflation
Deflation – a surplus labor and products
cause the value of these items to drop
Stagflation – time period of slow economic
growth characterized by high
unemployment and inflation at the same
time

10. 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

12. Who is Helped by Inflation?
1. Borrowers – pay back outstanding loans
with money worth more then originally
borrowed
3. Investors and Speculators – money
invested in stocks and bonds is worth
more as prices rise
5. Real Estate – homeowners see their
property values increase (Increases
Equity)

13. 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