ECONOMY chp12

What is inflation

General rise in average prices over time; inflation rate > 0 means prices are still going up

What is disinflation

Inflation rate is falling but still positive; prices are rising more slowly than before

What is deflation

Overall prices fall (negative inflation rate); rare and can be harmful to jobs and wages

Why falling inflation ≠ falling prices

Falling inflation just means slower price increases; prices can still be higher than last year

What is stagflation

High inflation and high unemployment at the same time; a worst-case combo

What CPI measures

Consumer Price Index tracks the cost of a fixed basket of goods relative to a base year

What base year means

Reference year set to 100; you don’t need to know it to compare two years if both use the same base

Inflation rate formula

(New index − Old index) ÷ Old index × 100

Percent change shortcut

New ÷ Old − 1 (then × 100 for percent)

Real vs nominal wage

Nominal is dollars paid; Real adjusts for inflation and shows purchasing power

What purchasing power means

How much goods/services your income can buy

How to keep purchasing power constant

Get a raise equal to the inflation rate

How to increase purchasing power

Get a raise greater than the inflation rate

Example raise math on 5400 per month

3% raise = 5400 × 0.03 = 162 more per month

Typical raise range in many jobs

About 2%–6% annual salary increase (not counting bonuses/stock)

CPI ratio meaning

CPInew ÷ CPIold shows how much prices multiplied between two years

Adjusting past wage to current dollars

Nominalold × (CPInew ÷ CPI_old)

Arizona minimum wage 2018

$10.50

Arizona minimum wage 2024

$14.35

Arizona CPI change 2018→2024

CPI 138.9 → 179.5; prices up about 29.2%

Arizona wage change 2018→2024

Wage up about 36.7%

Arizona purchasing power result

Higher in 2024 because the raise beat inflation

Arizona equivalent 2024 wage to match 2018 buying power

About $13.57 (= 10.50 × 179.5 ÷ 138.9)

New Mexico minimum wage 2009

$7.50

New Mexico minimum wage 2020

$9.00

New Mexico CPI change 2009→2020

CPI 130.7 → 191.6; prices up about 46.6%

New Mexico wage change 2009→2020

Wage up 20%

New Mexico purchasing power result

Lower in 2020 because the raise did not keep up with inflation

New Mexico equivalent 2020 wage to match 2009 buying power

About $11.00 (= 7.50 × 191.6 ÷ 130.7)

Louisiana minimum wage 2009 vs today

$7.25 both years (no nominal change)

Louisiana purchasing power trend

Lower today; same nominal wage but higher prices → real value fell

How recessions usually affect inflation

Recessions often bring lower inflation (“good” side effect), though output and jobs fall

Category vs overall inflation

Specific items (gas, housing) can move differently from overall CPI

How to evaluate a raise vs inflation

Compare your % raise to the % inflation over the same period

Why deflation is risky

Often tied to recessions; firms cut prices, then cut wages/jobs; economy weakens

Policy use of CPI and wages

Used to adjust pay/benefits so people maintain buying power over time