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Sustained increase in the prices of goods and
services in the economy
Is an indication of the rise in the general level
of prices over time

Inflation rate is the percentage change in the
price level from the previous period
Inflation =((Price Y2 – Price Y1)/ Price Y1)x 100

when economists measure the changes in the
average price level of goods/services in
nation.

Consumer Price Index (CPI)—is a measure of
the average change over time in the price of
a fixed group of products.
◦ Reported monthly
◦ Reported against a fixed period (or base) time
period—currently 1982-1984.
◦ Market basket—representative sample of
consumer goods. Food, clothing, housing,
utilities, entertainment, transportation, health
care. Measured each month in $.
◦ How much did it change? = CPI
 Calculating CPI
CPI = weighted current price
x 100
weighted base period price
Example = $3.00 (loaf of bread in 2017) X 100
$1.32 (loaf of bread in 1983)
CPI 2017 = 227.3

Inflation Rate—the monthly or yearly %
change in prices.
◦ The CPI is a tool that is used to calculate
Ex.Inflation rate= (CPI year A – CPI year B) x 100
CPI year B
Ex.Inflation Rate 145 – 140 x 100 = 3.57
140
Inflation Rate 3.57%


Consumer price index is the measure of the
overall cost of the goods and services bought
by a typical consumer
It is used to monitor the cost of living over
time


Index numbers assigned to each year to show
how prices have changed relative to a specific
year base.
CPI is the most commonly used measurement
of inflation.
Year
CPI
1914
10
1961
30
1977
60
1982*
100
1990
130
2002
180
2016
240

CPI = Price of market basket
x100
Price of mkt basket in base year
Year
Basket $
CPI
1999
40
80
2000*
50
100(Base year)
2001
55
110
2002
60
120
2003
75
150
2004
100
200
2005
200
400
Year
Basket $
2007
40
2008
60
2009
72
2010*
80
2011
92
2012
100
2013
120
CPI
Year
Basket $
CPI
2007
40
50
2008
60
75
2009
72
90
2010*
80
100
2011
92
115
2012
100
125
2013
120
150
1. Assume that CPI in Y1 is 100 and CPI in Y2 is
125, what is the inflation rate between the two
years?
Ans.
Inflation is 25%

2. Assume that CPI for Y1is 125 and the CPI for
Y2 is 150, what is inflation between the two
years?
Answer:
20%

Its not 150-125 but its
Inflation = (Y2-Y1) x 100
Y1
= (150 – 125 ) x100
125
3. CPI in Y1 is 80 and CPI in Y2 is 100. what is
inflation rate between the two years?
Answer:
25%
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Printing more money by the government
High lending levels
A drop in exchange rates
A rise in production and labour costs
Increased taxes or wars

As inflation rises, every dollar you have/own
buys a smaller percentage of a good or
service

When inflation goes up, there is a decline in
the purchasing power of money

Creditors lose and debtors gain

Uncertainty about what will happen next
make corporations and consumers less likely
to spend – delayed investment

People living off a fixed income such as
retirees see a decline in their purchasing
power and, consequently, their standard of
living

If inflation rate is greater than that of other
countries, domestic products become less
competitive

Controlled inflation is a sign that an economy
is growing – increase in wages

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Menu costs
Shoe leather costs
Fiscal drag
Inflationary noise

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Stimulating output
Reduce the burden of debt
Prevent some unemployment

The cause of inflation – demand pull inflation
is likely to be less harmful than cost push
inflation

Its rate – a high inflation is likely to cause
more damage than a low rate

Accelerating or stable rate

Whether the rate is one that has been
expected – unanticipated inflation causes
uncertainty

How the rate compares with that of other
countries – affects international
competitiveness.
i) Open market operation – an attempt by the
central bank to reduce cash in circulation(wipe
out excess liquidity) by selling equity or bonds
in the open market e.g. treasury bills
ii) Interest rates – increasing interest rates to
discourage consumption and investment – will
reduce aggregate demand, thus reducing
inflation
Increase taxes
 Taxes on income to reduce disposable
income
 Taxes on expenditure e.g. duty to make
goods and services expensive


Cut government expenditure – reduce
aggregate demand