Inflation Chapter 7 Inflation Widespread, persistent price increases Low inflation is a basic macroeconomic goal Price level: prices of goods and services in the aggregate Inflation Inflation rate The annual percentage increase in the price level 3% or less – most Americans are satisfied Deflation Inflation rate is negative Harm from Inflation Inflation hurts Fixed income Older generation Creditors Inflation helps Younger Debtors Life Cycle Theory Young are debtors so pay back with cheaper dollars Old are creditors and save with smaller dollars Inflation Anticipated inflation Expected by the public Protect themselves Unanticipated inflation Unexpected by the public Harmful An increase in inflation that cause the inflation rate to be higher than expected provides borrowers with a windfall Indexing to Offset Indexing Automatically adjusting the terms of an agreement for inflation COLA – clauses in labor agreement are a form of wage indexing Interest rate The price of borrowed money; expressed as a percentage Index to inflation Measuring Inflation Consumer Price Index (CPI) Measures prices of a market basket of purchases made by consumers living in urban areas Collection of goods and services used in the calculation of the CPI Producer Price Index (PPI) Measures wholesale prices, which are prices paid by firms