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Understanding Inflation: Effects, Causes, and Consumer Impact

Inflation signifies a general increase in prices, impacting purchasing power and economic decisions. The Consumer Price Index (CPI), calculated monthly by the Bureau of Labor Statistics, measures price changes in a standard market basket representing typical consumer goods. Inflation can be driven by various factors such as demand-pull and cost-push theories. When inflation exceeds 5%, it becomes unstable, threatening economic stability. Understanding these dynamics is crucial for consumers, as inflation can erode income, affect savings interest rates, and alter purchasing behavior.

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Understanding Inflation: Effects, Causes, and Consumer Impact

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Presentation Transcript

  1. Chapter 13 Section 2 Inflation

  2. Effects of rising prices • Inflation – general increase in prices • Purchasing power – the ability to purchase goods and services

  3. Price Indexes • measurement that shows how the average price of a standard group of goods changes over time • Helps consumers and business people make economic decisions

  4. Consumer Price Index • Computed each month by the Bureau of Labor Statistics • Determined by measuring the price of a standard group of goods meant to represent the “market basket” of a typical urban consumer • Market Basket – representative collection of goods and services • Market basket is divided into 8 categories of goods and services

  5. Market Basket • Items in the market basket are updated about every 10 years to account for shifting consumer buying habits • Inflation Rate – percentage rate of change in price level over time

  6. Determining the CPI • The BLS establishes a base period to which it can compare current prices • CPI = Updated Cost X 100 base period cost

  7. Types of Inflation • When the inflation rate exceeds 5%, the inflation rate itself becomes unstable and unpredictable • Core Inflation Rate – the rate of inflation excluding the effects of food and energy prices • Hyperinflation – inflation that is out of control

  8. Causes of Inflation • Quantity Theory of inflation states that too much money in the economy causes inflation • Demand Pull Theory states that inflation occurs when demand for goods and services exceeds existing supplies • Cost Push Theory states that inflation occurs when producers raise prices in order to meet increased costs

  9. Effects of Inflation • It’s a major economic problem! • It affects Purchasing Power… money today can’t buy what it would have a year ago • Income… inflation sometimes erodes income • Interest Rates…people receive a given amount of interest on money in their savings accounts, but their true return depends on the rate of inflation

  10. Review Questions • How does inflation affect purchasing power? • What is the purpose of the Consumer Price Index? • Compare/Contrast Demand-Pull inflation and Cost-Push Inflation

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