Inflation and Deflation

Only available on StudyMode
  • Download(s): 61
  • Published: January 2, 2005
Read full document
Text Preview
Inflation and Deflation

Introduction:

Keeping prices stable is one of the most important economic goals facing any nation. Governments face the responsibility to control inflation due to many factors affected by it. Understanding the definition of inflation will broaden our knowledge to other factors contributed in macroeconomics such as GDP (Gross Domestic Production), CPI (Consumer Price Index), and Deflation...etc.

I will relate my inflation study to US because most information regarding microeconomics is easy to find since everything is archived in USA.

What is Inflation?

Inflation is an increase in the general price level of goods and services in the economy. Therefore, Deflation is a decrease in the general price level of goods and services. But does that mean that inflation is an increase in all goods prices? No, an increase in all goods prices is not called inflation. It has to be an increase in price level for most or general goods and services. For example, if Toyota Land-cruiser price has increased, then it is not necessarily to say this is the result of inflation. But, if the prices of most cars, lands, properties, food ...etc, have increased then we can say this is inflation.

The Consumer Price Index:

It is an index that measures changes in the average prices of consumer goods and services. CPI is a measure of inflation that is widely reported. It includes only consumer goods and services in order to determine how rising prices affect the income of consumers. Items and services purchased by the government or a business are not considered in the CPI.

The CPI is an indicator of the effectiveness of government policy. In addition, business executives, labor leaders and other private citizens use the index as a guide in making economic decisions.

The USA government chose certain date to be the base year and set that equal to 100. Currently that date is 1984 - or more accurately the average of the years 1982-1984-. Every month the Bureau of Labor Statistics (BLS) makes a survey about the prices around the country for a basket of products and publishes the results as a number. To make it simple, let us assume that the basket consists of one item and that one item cost $1.00 in 1984. Then the BLS published the index in 1984 at 100. If today that same item costs $1.85 the index would stand at 185.0 of course a group of items would work the same way. If you have 100 items each would account for 1% of the total index.

Inflation is calculated using the following equation:

The following table illustrates CPI and the inflation rate in USA followed by a chart.

YEAR JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC ANN Inflation

2004 185.2 186.2 187.4 188 189.1 189.7 189.4 189.5 189.9 190.9 191

2003 181.7 183.1 184.2 183.8 183.5 183.7 183.9 184.6 185.2 185 184.5 184.3 183.96 2.27

2002 177.1 177.8 178.8 179.8 179.8 179.9 180.1 180.7 181 181.3 181.3 180.9 179.88 1.57

2001 175.1 175.8 176.2 176.9 177.7 178 177.5 177.5 178.3 177.7 177.4 176.7 177.10 2.85

2000 168.8 169.8 171.2 171.3 171.5 172.4 172.8 172.8 173.7 174 174.1 174 172.20 3.36

1999 164.3 164.5 165 166.2 166.2 166.2 166.7 167.1 167.9 168.2 168.3 168.3 166.60 2.21

1998 161.6 161.9 162.2 162.5 162.8 163 163.2 163.4 163.6 164 164 163.9 163.00 1.56

1997 159.1 159.6 160 160.2 160.1 160.3 160.5 160.8 161.2 161.6 161.5 161.3 160.50 2.29

1996 154.4 154.9 155.7 156.3 156.6 156.7 157 157.3 157.8 158.3 158.6 158.6 156.90 2.95

1995 150.3 150.9 151.4 151.9 152.2 152.5 152.5 152.9 153.2 153.7 153.6 153.5 152.40 2.83

1994 146.2 146.7 147.2 147.4 147.5 148 148.4 149 149.4 149.5 149.7 149.7 148.20 2.56

1993 142.6 143.1 143.6 144 144.2 144.4 144.4 144.8 145.1 145.7 145.8 145.8 144.50 2.99

1992 138.1 138.6 139.3 139.5 139.7 140.2 140.5 140.9 141.3 141.8 142 141.9 140.30 3.01

1991 134.6 134.8 135 135.2 135.6 136 136.2 136.6 137.2 137.4 137.8 137.9 136.20 4.21

1990 127.4 128 128.7 128.9 129.2 129.9 130.4 131.6...
tracking img