Gas crisis

1
Gas crisis?

• Avg. price of gallon of regular?
• 2.29 on August 1, 2005
• Are these truly Record high prices?
• Not really.

2
Gas crisis?
3

• The nominal price of gasoline (what we pay at the
  pump) has never been higher
• But, relative to income, inflation-adjusted
  (real) prices, are
• 70 of what they were in 1972
• 45 of what they were in 1981
• 37 of what they were in 1955 (chart)
• minutes worked to buy 1 gallon of gasoline
• 1930 20 minutes 2005 7 minutes

4
Inflation

• Long term rise in the average price level of
  goods and services
• a trend, not a one-time event!!
• Measured by the Consumer Price Index (CPI)
• CPI uses a basket of goods (and services)
  everybody buys.
• Calculates total price of this basket at one
  particular moment
• Assigns an indexed number to that price
• Examples of things in the basket?

5
Inflation (cont.)
Categories in the CPI
6
Inflation (cont.)

• Inflation Rate
• compares CPI in one year to CPI in previous year
• Rate Percent change in CPI over one year
• What is the current inflation rate?
• 2.0 for June 2005
• What does this number mean?

7
Working with the CPI

• An Index measures changes in a variable over
  time using a fixed base year for comparison.
• Some value of the variable is set at 100 for the
  Base Year (1975 in our table)
• Subsequent percent changes are measured relative
  to the base year
• Visual 4.2 Creating a Price Index

8
Working with the CPI (cont.)

• Percent change between years
• CPI (year 2) (CPI year 1)
• CPI (year 1) X 100

9
Why is Inflation Bad?

• Lower standard of living
• money is worth less over time.
• have less purchasing power
• Whats a Dollar Worth?
• Folks on fixed incomes are worse off.
• Leads to higher interest rates
• banks expect money will be worth less in the
  future, so they charge more for it now..

10
Who can benefit from inflation?

• People with home mortgages (or long term renters)
  at fixed rates
• The s they pay back to bank have less
  purchasing power as time goes by
• US Government debt
• paid back to bond holders is smaller due to
  inflation