Chapter 9 Inflation

Inflation

General and ongoing rise in the level of prices in an entire economy

Deflation

Negative inflation; a period when most prices in the economy are falling

Basket of Goods and Services

A hypothetical group of items meant to represent a typical set of consumer purchases. Used to calculate the price level over time. 

Price Index and Base Year

Unit free number derived from the price level. Base year is an arbitrary year chosen as the starting point, and its index value is set to 100

Consumer Price Index (CPI)

Most common measure of inflation in the U.S., calculated based on fixed basket goods and services representing average consumer’s purchases

Substitution Bias

Weakness of the CPI. Overstates the rise in the cost of living because it does not account for people switching to cheaper goods when prices change

Quality/New Goods Bias

Weakness of CPI. Overstates the rise in cost of living because it does not account for improvements in product quality or invention of new goods

Core inflation Index

Measure of inflation that takes the CPI and excludes volatile items like food and energy prices to better see the underlying inflation trend

Hyperinflation

Outburst of extremely high inflation.I

Indexing

Automatic adjustment of price, wage, or interest rate for inflation. (CostOLA) (AdjRM)