Inflation

1. Inflation • Inflation is a process of rising prices. • The inflation rate is measured as a percentage change in the average level of prices or the price level. • Consumer Price Index (CPI) • Deflation is negative inflation, the price level is falling.

2. Inflation • In December 1995, the CPI was 153.5 and in December 1996 it was 158.6. How would the inflation rate for 1996 be calculated?

3. 158.6 – 153.5 ´ 100 Inflation = 153.5 = 3.3% Inflation • The inflation rate for 1996 was:

4. Inflation in the United States

5. Inflation Around the World

6. Inflation Around the World

7. Is Inflation a Problem? • Predictability of inflation rates creates problems • High, unpredictable inflation causes resources to be diverted to predicting inflation rates. • This is a wasteful use of resources

8. Is Inflation a Problem? • Hyperinflation • Inflation in excess of 50% per month • Workers are paid daily • Money loses value rapidly • Workers spend their incomes quickly • 1994 • Zaire — 76% per month • Brazil — 40% per month

9. Is Inflation a Problem? • Policies that reduce the inflation rate increase the unemployment rate.

10. Inflation • Inflation is a steady increase in the average price level. • The rate of change of the average price level is called the inflation rate. • We use a price index (often the Consumer Price Index — the CPI) to measure the average level of prices as well as how fast it is changing.

11. Calculating theInflation Rate • In December, 1992, the CPI was 141.9. • In December, 1993, it was 145.8. • The inflation rate was [(145.8 - 141.9)/141.9] x 100 = 2.7%

12. Inflation in the United States • Since 1960, the worst inflation was in the mid-1970’s and 1982, hitting peak annual rates of 12% and 14% during those years. • Reacting to the inflation of 1980-1982, Federal Reserve Board Chairman Paul Volcker implemented a monetary policy designed to control inflation.

14. Inflation, Deflation,and Disinflation • If the price level is rising there is inflation. • If the price level is falling there is deflation. • During a period of disinflation the inflation rate is falling. The price level is still rising, but at a slower rate.

15. Inflation Around the World • There has been less inflation in the U.S. and other developed countries than in developing countries. • The most extreme inflation since 1970 occurred in Latin America where, in 1990, the inflation rate approached 600 percent per year.

18. Why Is Inflation a Problem? • Inflation is a problem because it makes the economy behave like a giant casino in which some people gain, others lose, and no one can predict who will be in each group. adds friction to the flow of credit. • Gains and losses occur because of unpredictable changes in the value of money. • Will see this clearly in Lecture 24.

19. The Problem ofRapid Inflation • In a rapid inflation, resources are diverted from productive activities to more accurately forecasting the inflation rate. • Forecasting inflation is socially unproductive.

20. Hyperinflation • When the inflation rate exceeds 50 percent per month, hyperinflation is occurring. • Germany, Poland, and Hungary experienced hyperinflations in the 1920s. • Brazil and Zaire had hyperinflation in 1994.