Inflation

Economic Challenges

INFLATION

• Economic condition of Average Prices Rising

• Jeans $20 2000• Jeans $60 2009

• GDP goes up => output remains the SAME (real GDP unchanged) – Real = adjusted for inflation

• Consumer Price Index (CPI) measures inflation– Goal is to have inflation below 2.0%

Why is inflation Bad?

• Difficult for Business to plan & price goods/services

• Difficult to fight once it begins to rise– Must significantly raise interest rates (tight monetary policy)

• Lowers your purchasing power

• Leads to lower GDP in the long run

REAL INFLATIONWhen Prices ↑faster than Income ↑

(then consumers notice!)

2010 Inflation

Overall +3.6%College + 8.0%

Inflation robsYOU of

Purchasing Power

Purchasing Power = amountof goods & services money buys

InflationCalculator

Historical Inflation

• Germany: “hyperinflation” after World War I– Currency became worthless

• USA: Late 1970s Stagflation—inflation at +13% – Federal Funds rate rose to 15% to fight inflation in the 1980’s– Very rare combination of recession & inflation

• USA: low inflation since 1985 [1.5-3.0%]– Economists are generally not concerned about inflation in 2011– Some economists fear the current “loose” monetary policy

2-Types of Inflation

• Demand-Pull Inflation:– Too many dollars chasing too few goods

– Demand Side Inflation

• Cost-Push Inflation– Increase in cost of any factors of production – examples: price of oil, wages, steel, etc….

– Supply Side Inflation

Who is Helped by inflation?

• People in large amount of Debt – Large Mortgages, Car Loans, Student Loans

If you owe1 million dollars

Inflation lets you pay yourdebt back in inflated dollars

Who is Hurt by Inflation?

• People on a fixed income, savers– Assuming you borrow with a fixed rate loan

If you receive$1,000 a month

(for life)

Inflation lowersyour purchasing power

Bernanke Interview Part II

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Inflation

RealGDP

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http://www.youtube.com/watch?v=LxSv2rnBGA8