CPI (Consumer Price Index) and Inflation

Inflation

•An increase in the average price level for goods and services across the economy

•A rise in the cost of one product is not a problem- but what if the price of tires, gas, groceries, toys, wood, cars, steel, etc were on the rise?

•Late 1970’s•Annual prices were increasing at a rate of 13% per year

•Car that cost $10,000 this year would cost $11,300 next year

•A $100 grocery bill would increase by $13

•People will spend money before it loses any more value- especially on big items like cars

•Inflation causes more inflation

Consumer Price Index (CPI)

•80,000 of the most commonly bought consumer goods

•Rental housing, utilities, food, clothes, entertainment, health care

•Total is compared to a base year- figures are calculated for various regions around the country

Producer Price Index (PPI)

•Measures the different prices of goods at all stages of the production process

•Figures are also compared to a base year- tally of products is kept

COLA (Cost of Living Adjustment)•Worker has to earn more money to keep up the standard of living that he or she had last year

•Professions have to keep up with inflation by offering workers cost of living increases

Supply Side Inflation

•Resource prices in our economy go up for various reasons

•Increased prices can force cost to increase for other consumer and producer goods

Demand Side Inflation

•People buying too many goods

•Too many dollars chasing too few goods

•Producers cannot keep up with consumer demand, and they raise prices

Wage Price Spiral

•When prices begin to rise, workers will begin to demand higher wages

Hyperinflation

•Inflation left unchecked and the money supply continues to grow too quickly- prices rise rapidly

•Germany in 1920’s•This week you buy the loaf of bread for $1, next week it is $50

Deflation

•Average prices for goods and services falls across the economy

Disinflation

•Inflation falls from a higher rate to a lower rate without becoming deflationary

•Inflation rates in 1980 were %13, in 1985 they were %4

Stagflation

•High inflation•High unemployment•Early 1970’s is a perfect example