INFLATION
Introduction
During World War II, we could buy a loaf of bread for $0.15, a new car for less than $1,000 and an average house for around $5,000. In the twenty-first century, bread, cars, houses and just about everything else cost more. A lot more. Clearly, we've experienced a significant amount of inflation over the last 60 years.
What Is Inflation?
Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.
There are several variations on inflation:
• Deflation is when the general level of prices is falling. This is the opposite of inflation.
• Hyperinflation is unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation's monetary system. One of the most notable examples of hyperinflation occurred in Germany in 1923, when prices rose 2,500% in one month!
• Stagflation is the combination of high unemployment and economic stagnation with inflation. This happened in industrialized countries during the 1970s, when a bad economy was combined with OPEC raising oil prices.
How Is It Measured?
• Consumer Price Index (CPI) - A measure of price changes in consumer goods and services such
as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of
the purchaser. U.S. CPI data can be found at the Bureau of Labor Statistics.
as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of
the purchaser. U.S. CPI data can be found at the Bureau of Labor Statistics.
• Producer Price Indexes (PPI) - A family of indexes that measure the average change over time in
selling prices by domestic producers of goods and services. PPIs measure price change from the
perspective of the seller. U.S. PPI data can be found at the Bureau of Labor Statistics.
selling prices by domestic producers of goods and services. PPIs measure price change from the
perspective of the seller. U.S. PPI data can be found at the Bureau of Labor Statistics.
Conclusion
In recent years, most developed countries have attempted to sustain an inflation rate of 2-3%.
After reading this tutorial, you should have some insight into inflation and its effects. For starters, you now know that inflation isn't intrinsically good or bad. Like so many things in life, the impact of inflation depends on your personal situation.
After reading this tutorial, you should have some insight into inflation and its effects. For starters, you now know that inflation isn't intrinsically good or bad. Like so many things in life, the impact of inflation depends on your personal situation.
