Inflation

What is the inflation rate?

The percentage increase in the price level from one year to the next.

Define Price Level.

A measure of the average prices of goods and services in the economy.

What is inflation?

An increase in the price level.

What is deflation?

A decline in the price level.

What does disinflation refer to?

A decline in the inflation rate.

What is hyperinflation?

An out-of-control inflationary spiral.

What causes demand driven inflation?

Inflation that results from an increase in aggregate demand.

What is the GDP Deflator?

The broadest measure of the price level, including the price of every final good and service.

What does the Consumer Price Index (CPI) measure?

The average change over time in the prices a typical urban family of four pays for goods and services.

Define the Producer Price Index (PPI).

An average of the prices received by producers of goods and services at all stages of the production process.

How is CPI calculated?

Cost to purchase a constant basket of goods in the current year divided by the cost in the base year, multiplied by 100.

What is the impact of substitution bias on CPI?

It overstates true inflation by not accounting for substitutions consumers make when prices change.

What is 'real' versus 'nominal' variable?

A nominal variable is defined in current year prices, while a real variable is corrected for price changes.

How is the real interest rate calculated?

Nominal Interest Rate minus Inflation Rate.

What are anticipated and unanticipated inflation?

Anticipated inflation is expected, while unanticipated inflation is unexpected, both affecting purchasing power.

What effect does inflation have on borrowing costs?

Inflation impacts the costs and gains of borrowing, making real interest rates a clearer measure of actual borrowing cost.

What corrections can be made using inflation for wage assessments?

To determine if nominal wage increases have improved purchasing power over time.

What are the four biases that affect CPI calculations?

Substitution bias, Increase in quality bias, New product bias, and Outlet bias.

Why do economists believe CPI overstates true inflation?

Economists estimate overstatement by about 0.5 to 1 percentage point.

What should a borrower consider regarding interest rates and inflation?

Borrowers must consider nominal interest rates and potential losses in purchasing power due to inflation.