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7.3: Focusing on the Rate of Change

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    287953
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    You should think of price changes as you would a moving car. I emphasize the word "moving" because the focus is not on the destination but rather the direction and speed of the prices.

    The direction the car is moving is analogous to changing prices. If the car is moving forward, then prices are rising, and if the car is moving in reverse, prices are falling.

    If the car is moving forward at a constant speed (let's say 50 mph), then this is like inflation rising at a constant rate (let's say 2.0 percent each year). In this scenario, the year-to-year change in the actual rate of inflation is 0 percent. If the car slows from 50 mph to 30 mph, it is still moving forward but at a slower rate. This is the disinflation situation described in the inflation headline: prices are still rising, but at a slower rate.

    clipboard_eb14e201945904a6fbab23974814af768.png

    Finally, if the driver stops the car and puts it into reverse -- a direction change -- then this is like the average price falling, or deflation. When the month-to-month inflation rate is negative (let's say -2.0 percent per month), then, on average, goods and services are less expensive.


    This page titled 7.3: Focusing on the Rate of Change is shared under a CC BY-NC-SA 4.0 license and was authored, remixed, and/or curated by Martin Medeiros.