INFLATION

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• INFLATION
• Increase in general level of prices

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Consumer Price Index

• Tool to measure inflation
• Measures prices of a typical basket of
  goods/services
• Currently base year is 1997

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Consumer Price Index

• CPI Price of basket (current year) x 100
• Price of same basket (base year)

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• INFLATION RATE (i)
• change in the average level of prices

i CPI2 CPI1 CPI1 x
100
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Calculating Rate of Inflation

• EXAMPLE
• CPI in 2005 116.4CPI in 2006 119.0
• CPI2 CPI1 i CPI1 x
  100
• 119.0 116.4 i 116.4
  x 100
• i 2.2

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Inflation in Canada
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Types of Inflation

• Demand pull inflation
• excessive aggregate demand in relation to
  capacity output
• Cost push inflation
• rapid ? in resource cost (supply shocks)
• higher per unit production cost
• higher consumer prices

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Unanticipated Inflation

• HURTS
• Fixed-income receivers
• Savers
• Creditors
• HELPS
• Flexible income receivers
• Debtors

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Anticipated Inflation

• EFFECTS LESS IF INFLATION ISCORRECTLY
  ANTICIPATED
• COLA clauses
• Inflation premiums on loans

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• Deflation
• A decrease in the general level of prices.
• Stagflation
• Stagnation (high unemployment) combined with
  inflation (rising prices).
• Hyperinflation
• Extremely rapid inflation.

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• Hyperinflation
• Creates inflationary expectations
• ? wages, spending cause further pressure on
  prices
• Encourages speculation
• Causes inflationary spiral
• Possible economic, social, and political
  breakdown

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