Ch 13 sec 3: Inflation

Inflation is an extended rise in the economy’s overall price level. When prices rise, the dollar can buy less;

thus, it loses purchasing power.

We can adjust prices to reflect effect of inflation. For example, in 1915 JD Rockefeller’s net worth was $900 million dollars. His net worth, adjusted for inflation, would be $189 billion dollars today.

Model T

We measure the rate of inflation with the Consumer Price Index.

The CPI shows the average change in price of a wide variety of goods and services. It is an

average.

The typical annual (yearly) rate of inflation in the US is

3%.

Some nations have experienced hyperinflation, which is a dangerously high

rate of inflation.

Hyperinflation: Yugoslavia, 1993

• 5 quadrillion percent rate of inflation (That’s 5,000,000,000,000,000%!)

• Typically 1 Loaf of bread costs 1 Dinara, and imagine your life-savings was one million Dinara.

• Nov. 12, 1993: 1 Loaf cost 1 million Dinara

Nov. 23, 1993: 1 Loaf cost 6.5 million Dinara

Dec. 15, 1993: 1 Loaf cost 3.7 billion Dinara

Dec. 29, 1993: 1 Loaf cost 950 billion Dinara

Jan. 4, 1994: 1 Loaf cost 6 trillion Dinara!

Post WWI hyperinflation in Germany

Late 1960’s: Demand pull inflation due to Vietnam War.

US tries to supply troops while keeping everyone at home supplied.

Cost Push Inflation: 1973 Yom Kippur War

US support for Israel leads to Arab oil embargo

Scarcity of gas leads to high prices for gas…

…leads to high prices for everything else.