Inflation Notes
Unit 6 - Inflation & Economic Growth
Inflation
As prices for goods and services that we consume increase, inflation is the result. The inflation rate is used to measure the rate of change in the overall price level of goods and services that we typically consume. While inflation is a regular annual occurrence in modern economic systems, it only becomes a policy concern when reaching unacceptably high levels. As we shall see, many modern economic policymakers have developed a short fuse for reacting to potential increases in inflation.
To the majority of us, small doses of annual inflation seem normal and uneventful. Historically, despite bursts of sustained inflation during the Roman Empire, the Middle Ages and the reign in England of Queen Elizabeth I, prices remained broadly stable over long periods, including periods of falling prices. In fact, the average price level in Britain in the early 1930s was no higher than in the 1660s.
Measuring Inflation
An inflation rate gives us a consensus or aggregate measure of the price changes occurring for a number of different goods and services. When we look at individual goods, price changes often vary greatly. During the past decades the price of goods such as automobiles, gasoline, movies, health care, and housing have increased significantly. In contrast, the price of calculators and computing power has decreased substantially.
There are many different measures of inflation; we will focus on the most common index known as the consumer price index (CPI). There are several steps taken in calculating the current CPI: 1. Measuring the price changes of all goods is complex if not impossible. Instead a market basket of goods is used which represents many of the goods and services that we consume frequently. Items such as housing, food, transportation, communication, etc. are represented by specific goods whose price changes can be accurately recorded over time. 2. The individual items in the market
Inflation
As prices for goods and services that we consume increase, inflation is the result. The inflation rate is used to measure the rate of change in the overall price level of goods and services that we typically consume. While inflation is a regular annual occurrence in modern economic systems, it only becomes a policy concern when reaching unacceptably high levels. As we shall see, many modern economic policymakers have developed a short fuse for reacting to potential increases in inflation.
To the majority of us, small doses of annual inflation seem normal and uneventful. Historically, despite bursts of sustained inflation during the Roman Empire, the Middle Ages and the reign in England of Queen Elizabeth I, prices remained broadly stable over long periods, including periods of falling prices. In fact, the average price level in Britain in the early 1930s was no higher than in the 1660s.
Measuring Inflation
An inflation rate gives us a consensus or aggregate measure of the price changes occurring for a number of different goods and services. When we look at individual goods, price changes often vary greatly. During the past decades the price of goods such as automobiles, gasoline, movies, health care, and housing have increased significantly. In contrast, the price of calculators and computing power has decreased substantially.
There are many different measures of inflation; we will focus on the most common index known as the consumer price index (CPI). There are several steps taken in calculating the current CPI: 1. Measuring the price changes of all goods is complex if not impossible. Instead a market basket of goods is used which represents many of the goods and services that we consume frequently. Items such as housing, food, transportation, communication, etc. are represented by specific goods whose price changes can be accurately recorded over time. 2. The individual items in the market