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