Welcome to inflation - the silent force that changes your purchasing power! You've mastered GDP and unemployment, now let's explore how rising prices affect everything in the economy.
Inflation is the sustained increase in the general price level over time. When prices rise, your dollar buys less.
Engagement Message
What's something you've noticed getting more expensive recently?
The Consumer Price Index (CPI) tracks inflation by following a "basket" of typical household purchases. This includes food, housing, transportation, and entertainment.
Think of it as a shopping cart filled with what average families buy regularly.
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Can you think of three everyday purchases you'd expect to find in the CPI basket.
Here's how we calculate the inflation rate using CPI:
Inflation Rate = [(CPI This Year - CPI Last Year) ÷ CPI Last Year] × 100
If CPI was 200 last year and 206 this year: [(206-200) ÷ 200] × 100 = 3%
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In one sentence, what does a 3% inflation rate say about average prices?
Real versus nominal values matter hugely! Your nominal wage might increase from $50,000 to $52,000, but if inflation is 5%, your real purchasing power actually decreased.
Real value removes inflation's effect to show true purchasing power changes.
Engagement Message
If your salary stays flat but inflation is 4%, are you better or worse off?
Anticipated inflation is expected and people can prepare. Workers negotiate wage increases, businesses adjust prices, and loans include inflation premiums.
Unanticipated inflation catches everyone off guard and creates serious problems.
Engagement Message
Which type of inflation would be more disruptive to your personal finances?
