Inflation

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Inflation
prices
Inflation is a sustained increasein the prices
of goods and services(or the cost of living). To
measureinflation, we look at changes in
theprice of a market basket of goodsor services
households typicallypurchase with their income
Time
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Consumer Price Index (CPI)

• We use the CPI to measure changes in the cost of
  living experienced by households.
• The CPI is the narrow price index in that the
  market basket used to construct it includes items
  purchased by households.
• The inflation rate is simply the percentage
  change in the CPI from one period to the next.

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Computing the inflation rate
How would wecalculate theinflationrate for,
say,the year 1990?
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On average, the prices of goodsand services in
the CPI market basketincreased by 5.4 from
1989 to 1990
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Inflation issues

• ? We want to examine the following issues
• What are the costs of inflation?
• Is there a tradeoff between inflation and
  unemployment?
• Assuming there is a tradeoff between inflation
  and unemployment, can unemployment be too low?
• Why is it that once inflation starts, it tends to
  persist?
• Is monetary expansion to blame for inflation?

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Inflation is a drag!
Costs of Inflation

• Inflation results in the arbitrary and
  inequitable distribution of real income and
  wealth.
• Inflation creates an opportunity to profit from
  non-productive speculative activities.
• Inflation affects expectations about future
  increases in the cost-of-living, giving rise to
  inflation inertia.
• Inflation distorts the information conveyed by
  market prices (including wages).
• Inflation undermines confidence in economic and
  political institutions.

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Who suffers from inflation?
With the cost-of-livingrising, what I havehere
is losing valueby the hour

• Lenders
• Taxpayers
• Holders of currency
• People on fixed incomes

We mortgagelenders got creamedin the 70s and
early80s
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How does inflation affect me?

• Has the growth of my income kept pace with the
  cost of living?
• Is my wealth concentrated in assets that tend to
  hold their value in an inflationary environment?
• I am in debt?

Precious metals, rareart, and commercialreal
estate are goodplays if you expect inflation
A lot of peoplelost money in the stock market
in the 70s
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Seattle Transit Workers
Ave. Income of Seattle Transit Employees
The question is were they betteroff in 1996
interms of realpurchasingpower?
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Are Seattle transit employees any better off, at
least based on these figures?