1. Ch. 26 Inflation

2. Meaning of Inflation • Inflation is rise in the general level of prices • Reduces the purchasing power of $ • Inflation is general, not specific; some prices may rise while others may fall

3. Measuring Inflation • CPI- Consumer Price Index • It’s a “market basket” of some 300 goods and services purchased by urban consumers • Equation to find CPI • Equation to find rate of inflation

4. Types of Inflation • Demand-Pull Inflation • Demand exceeds output, pushing up prices • i.e., college tuition, medicine • http://www.youtube.com/watch?v=V122ICNS8_0&feature=related • http://www.usdebtclock.org/ • Cost-Push Inflation • Rising costs in factors of production increase per-unit cost of item; demand can decrease but these factors still push the price up • i.e., increased labor costs for GM

5. Complexities • The two types of inflation can get muddled together but their effects are different. • Demand-pull could theoretically be permanent • Cost-push is self-correcting. This type can generate a recession if it goes unchecked

6. Core Inflation • Core inflation subtracts the most volatile items in the CPI, food and energy. This gives a more clear picture of overall inflation. • http://www.bls.gov/cpi/cpid1208.pdf