Skip to main content
Social Sci LibreTexts

7: Inflation

  1. Last updated
  2. Save as PDF
  • Page ID
    312723

    • \( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \)

    \( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)

    \( \newcommand{\dsum}{\displaystyle\sum\limits} \)

    \( \newcommand{\dint}{\displaystyle\int\limits} \)

    \( \newcommand{\dlim}{\displaystyle\lim\limits} \)

    \( \newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\)

    ( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\)

    \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\)

    \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\)

    \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\)

    \( \newcommand{\Span}{\mathrm{span}}\)

    \( \newcommand{\id}{\mathrm{id}}\)

    \( \newcommand{\Span}{\mathrm{span}}\)

    \( \newcommand{\kernel}{\mathrm{null}\,}\)

    \( \newcommand{\range}{\mathrm{range}\,}\)

    \( \newcommand{\RealPart}{\mathrm{Re}}\)

    \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\)

    \( \newcommand{\Argument}{\mathrm{Arg}}\)

    \( \newcommand{\norm}[1]{\| #1 \|}\)

    \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\)

    \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\AA}{\unicode[.8,0]{x212B}}\)

    \( \newcommand{\vectorA}[1]{\vec{#1}}      % arrow\)

    \( \newcommand{\vectorAt}[1]{\vec{\text{#1}}}      % arrow\)

    \( \newcommand{\vectorB}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \)

    \( \newcommand{\vectorC}[1]{\textbf{#1}} \)

    \( \newcommand{\vectorD}[1]{\overrightarrow{#1}} \)

    \( \newcommand{\vectorDt}[1]{\overrightarrow{\text{#1}}} \)

    \( \newcommand{\vectE}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash{\mathbf {#1}}}} \)

    \( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \)

    \(\newcommand{\longvect}{\overrightarrow}\)

    \( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)

    \(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)

    • 7.1: Introduction to Inflation
      This page examines inflation, defining it as a widespread price increase while contrasting it with relative price changes. It includes extreme hyperinflation cases, notably Zimbabwe's peak of 79.6 billion percent, resulting in commodity shortages and currency abandonment. The content aims to educate on inflation measurement, historical experiences, economic implications, and challenges in inflation statistics, along with a preview of policies to combat inflation.
    • 7.2: Tracking Inflation
      This page examines inflation, detailing its measurement, economic impacts, and effects on purchasing power from 1970 to 2021. It emphasizes the significance of understanding inflation rates via index numbers and purchasing baskets, showing how these are calculated using weighted averages based on spending habits. Additionally, it introduces price indices, which allow for easier tracking of price level changes over time.
    • 7.3: How to Measure Changes in the Cost of Living
      This page explains the Consumer Price Index (CPI) as the main U.S. inflation measure, detailing its calculation using a fixed basket of goods and addressing biases like substitution and quality changes. It describes the Bureau of Labor Statistics' updates to improve accuracy.
    • 7.4: How the U.S. and Other Countries Experience Inflation
      This page discusses historical and international inflation patterns, noting low U.S. inflation (2% to 4% annually) over the past three decades and significant spikes post-WWI, WWII, and in the 1970s. It highlights deflation during recessions and variations in global inflation rates, with industrialized nations experiencing high rates in the 1970s, while others like the Soviet Union maintained low, controlled rates.
    • 7.5: The Confusion Over Inflation
      This page explores the multifaceted impacts of inflation on economic behavior, including its potential to redistribute purchasing power and create public dissatisfaction. Moderate inflation may benefit some, like borrowers, but generally imposes challenges such as diminished purchasing power for cash holders and fixed-income retirees, complicating long-term planning. The historical context of Germany's hyperinflation illustrates severe inflation's disruption of market functions.
    • 7.6: Indexing and Its Limitations
      This page explains indexing as a method to adjust payments for inflation, covering areas such as wages (COLAs), adjustable-rate mortgages, and government programs (income tax brackets, Social Security). While indexing helps alleviate inflation worries, it is not universally implemented. The page also introduces macroeconomic policies aimed at managing inflation and emphasizes the balance between preserving purchasing power and ensuring sufficient goods production.
    • 7.7: Key Terms
      This page covers inflation concepts and measurement, including adjustable-rate mortgages, base years, and key indicators like the Consumer Price Index (CPI) and core inflation indices. It defines terms such as deflation and hyperinflation, and the Employment Cost Index. The text also addresses biases in inflation measurement, such as quality and substitution bias, which can distort the true cost of living.
    • 7.8: Key Concepts and Summary
      This page addresses inflation measurement through index numbers, detailing how they express price levels and calculate rates. It points out challenges related to fixed baskets of goods, such as substitution and quality biases, and introduces crucial measures like the Consumer Price Index (CPI) and GDP deflator. Historical U.S. inflation trends are reviewed, showing varied impacts on different economic actors. The page also explores automatic inflation adjustments and their limitations.
    • 7.9: Self-Check Questions
      This page covers economic concepts related to inflation measurement and implications, featuring examples like fruit prices and discretionary spending. It includes a table of fruit prices from 2001 to 2004 for yearly expenditure calculations and price index creation based on 2003. The discussion extends to inflation rate calculations, impacts on individual costs of living, critiques of the Consumer Price Index, its biases, and considerations for adjustable-rate mortgages amidst changing inflation.
    • 7.10: Review Questions
      This page discusses how economists use a basket of goods and services to measure price levels, emphasizing the advantages of index numbers over dollar values for reflecting price changes. It clarifies the distinction between price levels and inflation rates while examining biases in fixed baskets. Historical U.S. inflation trends, the definition of deflation, and the effects of inflation on different economic actors, along with the concept of indexing, are also explored.
    • 7.11: Critical Thinking Questions
      This page analyzes the complexities of measuring inflation, highlighting limitations of CPI and GDP deflator due to biases like substitution and quality/new goods. It evaluates appropriate contexts for using these metrics in adjusting nominal to real values and discusses how inflation influences perceptions of income relative to wage growth. Additionally, it addresses the balance of government benefits from inflation against the justification for indexed bonds.
    • 7.12: Problems
      This page covers inflation and price indices, detailing how to calculate inflation rates and price indices with different base years. It highlights that consistent nominal increases do not guarantee stable inflation rates and discusses the effects of unexpected inflation on various economic participants. Additionally, it examines the purchasing power of future payments considering inflation over time.

    This page titled 7: Inflation is shared under a CC BY 4.0 license and was authored, remixed, and/or curated by OpenStax via source content that was edited to the style and standards of the LibreTexts platform.