Inflation

What is Inflation?

• Definition: Inflation is the general, sustained increase in prices, which can maintain purchasing power if all prices rise equally.

Why Do We Fear Inflation?

• Uneven Increases: Prices rising at different rates can lead to inequality in economic impact.

• Fixed Incomes: Those on fixed incomes, like retirees, may suffer as their purchasing power decreases.

• Long-term Contracts: Fixed contracts can result in income lagging behind rising prices.

Hyperinflation

• A rapid, extreme increase in inflation that leads currencies to lose value quickly. Example: Zimbabwe's fifty-trillion-dollar note.

Real vs. Nominal Income

• Example: If Emilija's income rises from $1,000 to $1,050 (5% nominal increase) but prices rise by 10%, she effectively loses purchasing power.

Measuring Inflation

• Key indices: GDP Deflator, CPI, and PPI monitor price changes.

Core Inflation

• Excludes volatile food and energy prices for a stable measure, though opinions vary on its usefulness.

Understanding Deflation

• Deflation is a sustained decline in prices, often harmful to economic activity and employment.