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Understanding Inflation: Effects & Implications for Your Finances

Learn how inflation impacts your purchasing power, income, and savings. Discover the difference between nominal and real numbers in economic calculations. Find out who benefits and who loses in an inflationary economy. Use an inflation calculator to see how prices have changed over time.

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Understanding Inflation: Effects & Implications for Your Finances

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  1. Inflation Who wins & loses from inflation

  2. Falling Purchasing Power $100in 1958 => need $897 in 2019 Inflation calculator on my website 

  3. INFLATION • Economic condition of Average Prices Risingfor same good/service • Lowers the purchasing power of a dollar • Economic numbers must be adjusted for inflation • Nominal numbers–Not adjusted for inflation • Real numbers – Adjusted for inflation • Example: Prices rise 5% & you get a 3% raise: • Nominal pay increase = • Real Pay increase =

  4. Real Minimum Wage

  5. Nominalvs. Real • A country sells 10 pairs of blue jeans in both 1999 & 2014. • Blue Jeans cost $20 in 1999 & $40 in2014 (assume same exact jeans) • What is the change in Nominal & Real GDP for 2014? • NominalGDP = Current price X Qty sold • Nominal GDP doubles from $200 in 1999 to $400 in 2014 • ($20 X 10 units & $40 X 10 units) • Real GDP = Base Year Price X Qty Sold • Real GDP unchanged at $400=> same in both years! • $40 X 10 units & $40 X 10 units (using 2014 as base year)

  6. Consumers notice inflation when their paychecks start to buy less! COLA = cost of living adjustment Social security benefits & some pensionshave a yearly COLA

  7. 2-Types of Inflation • Demand-Pull Inflation: • Too many dollars chasing too few goods(caused by printing money) • Spending increases faster than production (Venezuela today) • Demand Side Inflation • Cost-Push Inflation • Large increase in cost of factors of production (input prices) • examples: price of oil, labor, steel, etc…. • Supply Side Inflation (Occurred in late 1970’s in USA)

  8. Inflation:Unexpectedvs. Expected • Unexpectedor sudden inflation is what really creates winners& losersin our economy • In theory, if actual inflation is predictable, workers, employers, savers, lenders & borrowers have time to adjust/plan • Therefore, expected inflation is less harmful What you Expect? Actual Inflation?

  9. Who is Hurt by Unexpected Inflation? • People on a fixed income • $500 a month pension => Nominal dollars unchanged => real income falls • Minimum wage workers • Wage increases usually fall behind (lag) inflation • Savers • Interest earned does not cover inflation rate… • $ in savings account falls in value

  10. Who is Helped by inflation? • People in large amount of Debt • Fixed interest rates on Mortgages, Car Loans, Student Loans • Loan stays the same in Nominal Dollars • Loan falls in Real Dollars Example: Nominal payment fixed @ $2,027 Real payment falls 30 Year Mortgage $400,000 4.5% fixed interest rate Monthly payment = $2,027

  11. Inflation Worksheet

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