Inflation Notes

Inflation and Changes over Time

Terms and Concepts to Cover:

  Inflation Rate

  Inflation Percentage

  Calculating Inflation (Year Later minus Year Earlier)

                                            Year Earlier                          = Rate x 100)

  Index Year = 100

  CPI

  CPI Changes (Index Year 2 minus Index Year 1)

                                 Index Year 1                                 = Rate  x 100)

  GDP Deflator

  Nominal Interest

  Real Interest (Nominal Interest Rate minus Inflation = Real Interest)

  Stagflation

  Rule of 70

  Anticipated Inflation

  Demand Pull Inflation

  Cost Push Inflation

  Deflation

  Disinflation

  Economic “Norms”

 

Inflation

Demand Pull Inflation

Too many consumers chasing too few goods (can be normal)

Excessive spending out of fear of future inflation

Too few unemployed and wage inflation due to competition

Cost Push Inflation

Natural disasters cut supply

Political actions like boycotts cut the supply (OPEC 1973, 1979)

Natural reduction of resources with no new discoveries

Political Inflation

Governments printing too much currency to cover debts…

Examples:

Continental Dollars of the 1770’s and 1780’s

Germany of the early 1920’s

Zimbabwe Civil War 2008 to 2011

Inflation “Helps”:

Those who pay back loans at a fixed interest rate

Inflation “Hurts”:

Those who lend money at a fixed interest rate

Those saving money at fixed rate interest rate returns

Those on any long term fixed level of income

Those trying to hire workers and keep costs under control

Those trying to plan future business projects and project costs

Economic Norms:

Unemployment =	4 to 5 % (post 1980 in the USA)
Inflation =	2 to 3 % per year (“Anticipated Inflation”)

Misery Index = Unemployment and Inflation Rates Together:

Acceptable Misery	6 to 8
Excessive Misery	Any double digit number

Why is Unemployment Bad?

Not enough Consumption (GDP)

Too much poverty...

Too much government assistance needed.

Why is Unemployment Good?

More workers available for future expansions.

Less pressure to raise wages.

Why is Inflation Bad?

Loss of real wages

Loss of real wealth

Loss of the value of savings

Loss of the value of fixed income

Panic buying

Loss of the value of currencies

Loss of the incentive to take financial risks

Loss of the incentive to hire

Why is Inflation Good?

If you owe money, you pay back cheaper money

BECAUSE Unemployment hurts the unemployed, but Inflation hurts

everyone, always assume that government policies should focus on controlling inflation FIRST. 

Economic Norms

GDP growth (real):

          2 to 3% per year is considered manageable growth.

          Negative GDP change is officially a “recession”.

          1 to 2% growth is considered weak.

          Over 4% probably puts too much inflation pressure on

                   the economy.

Unemployment %:

          4 to 5% per year seems to be attainable (at least since

                   the 1990’s).

          Over 5% unemployment seems linked to recessions.

          Under 4% appears to cause worker shortages and

                   leads to wage inflation.

Inflation Rate (usually measured with the CPI):

          2 to 3% seems attainable and “normal” for steady

                   growth.

         

1 to 2% inflation seems to indicate too little growth.

4 to higher %’s indicate an overheated economy:

          1) inflation due to too much demand –or-

          2) inflation due to too little sup