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What is Inflation?
Inflation is the decline in the value of
money in relation to the goods that it can
buy.
The periodic increase in the cost of living.
Inflation Rate
The inflation rate is defined as the
percentage change in the annual CPI.
Suppose that you earned $30,000 in 1995.
How much did you need to earn to maintain
the same standard of living next year?
Example
CPI 1996 CPI 1995
Change in CPI 1995 to 1996 = ---------------------------- x 100%
CPI 1995
156.9 152.4
Change in CPI 1995 to 1996 = -------------------- x 100%
152.4
Change in CPI 1995 to 1996 = 3.0%
Buying Power
How is the buying power of $1.00
measured?
How can we compare prices of items in
different years?
ANSWER: Use of price indices.
Housing
Transportation
Food
Energy
Medical Care
Apparel and Upkeep
Other
41.4%
17.8%
16.2%
8.2%
6.4%
6.1%
3.9%
CPI
130.7
136.2
140.3
144.5
148.2
152.4
156.9
160.5
163.0
166.6
172.2
177.1
Example
A worker earned $10,000 in 1967 and
$14,000 in 1975. The average CPI 1967
was 100, CPI for 1975 was 161.2.
100.0
Constant Dollars 1967 = $14,000 x -------
161.2
An income of $14,000 in 1975 dollars was
worth only $8,685 in 1967 dollars.