Transcript Inflation

Calculating % Change
• You buy a stock at $8 per share
• It is now at $10 per share
• What % gain did you make?
Formula is:
[(Ending Price – Beginning Price) / Beginning Price] * 100
(10-8)/8 * 100 = +25%
Inflation
Measuring Inflation using a Price Index
Falling
Purchasing Power
INFLATION
• Economic condition of Average Prices Rising
– Lowers the purchasing power of a dollar
• Economic numbers must be adjusted for inflation
– Real numbers – adjusted for inflation
– Nominal numbers – NOT adjusted for inflation
• A country sells 10 pairs of blue jeans in both 1999 & 2014.
– Blue Jeans cost $20 in 1999 and $40 in 2014 (assume same exact jeans)
– What is the change in nominal & real GDP for 2014?
• Nominal GDP doubles from $200 to $400
• Real output is unchanged
Consumers notice
when their paychecks
start to buy less!
COLA
= cost of living adjustment
Social security benefits has an
annual COLA
Historical Inflation
• Germany: “hyperinflation” after World War I
– Currency became worthless
• USA:
Late 1970s—Oil Crisis-- 13% inflation
– Called “Stagflation”
• USA:
low inflation since 1985 [2.0-3.0%]
• USA speed limit: target for inflation is under 2.5%
Some factors: Technology & Globalization
Stagflation
Low inflation
1985 - 2012
Deflation
CPI Index
• Consumer Price Index (CPI) measures inflation
– Pick any year as a base year which = 100
• Uses a market “basket” of goods & services
– Government prices basket monthly
– Compares cost of the new basket to old basket
• CPI
=
Current Price Value of Basket
X 100
Price Value of Basket in Base Year
= CPI Index
What is in the CPI’s Basket?
17%
Transportation
15%
Food and
beverages
Education and
communication
42%
Housing
6%
6%
6% 4% 4%
Medical care
Recreation
Apparel
Other goods
and services
CPI Index Calculation
Price Value of Basket
Use 2005 as base year
2005
2007
CPI Index =
$10/$10 X 100 = 100
$10
$12
120 is the
CPI Index for
2007
($12/$10) X 100 = 120
End Result:
Current Price Value of Basket
X 100
Price Value of Basket in Base Year
= CPI Index
Inflation rose 20%
(120 – 100)/100 X 100 = +20%
Worksheet
• Creating an Index