Inflation

Chapter Objectives

After you have studied this chapter you should be able to explain how inflation is measured and how index numbers are constructed and used; be able to distinguish between different types of inflation as well as their causes, and enumerate the benefits and costs associated with inflation.

Chapter Review: Key Points.

1. Index numbers are used to compare particular variables over time. The Consumer Price Index (CPI) measures average price changes for a given bundle of consumer goods over time. The CPI is based on typical consumer patterns for most of the urban population.

2. The CPI is used to convert nominal values to real values. It is also used extensively as an escalator clause (cost-of-living adjustment) in many contracts.

3. Deflating nominal variables means dividing their monetary values by (1 percent of) a price index.

4. Major difficulties in computing the CPI include problems inherent in adjusting the index for: (a) new products; (b) changes in the qualities of existing products; (c) changes in the composition of consumer expenditures; and, (d) already owned consumer durables such as housing.

5. The Producer Price Index (PPI) measures changes in the prices of goods in other than retail markets. The GDP Deflator adjusts GDP for changes in prices. It is composed of relevant portions of the CPI and the PPI, plus some additional prices covered by neither.

6. Creeping inflation occurs relatively slowly; galloping inflation occurs when average prices move at double-digit rates. Hyperinflation entails average price hikes exceeding 50 percent monthly. Inflation is generally less harmful if it is anticipated than if it is a surprise to people.

7. Inflation increases transaction costs by making price information obsolete faster, and it causes resources that could be used productively elsewhere to be used for repricing. These are the menu costs of inflation.

8. Inflation also distorts relative prices and economic decision making, and depresses incentives to save. Capital accumulation may or may not be hampered by inflation, depending on business expectations and the availability of funds for investment. These are the distortion costs of inflation.

9. The discomfort (misery) index is the sum of the inflation rate and the unemployment rate. It averaged 6-7 percent during the 1950s and 1960s. During the late 1970s and early 1980s, the index ranged from 13 to more than 20 percent. By 1990, economic growth had pushed the index below 10 percent.

10. There are social costs of inflation because people feel greater uncertainty during inflationary periods. People living on fixed incomes are hurt by inflation, but many transfer payments and wage contracts now have escalator clauses that adjust payments for price level changes. Borrowers tend to gain from unexpected inflation, while the ultimate lenders (e.g., savers with bank deposits) lose. When inflation boosts income, meeting a fixed mortgage payment becomes easier, so heavily mortgaged homeowners tend to gain.

3. Vocabulary practice: switching.

Get ready for an oral (written) translation exercise based on the economic terms in bold, as well as other relevant words and phrases from the text.

Nominal value; причины инфляции; real value; широко использовать ч-л; cost-of-living adjustment; изменяться со скоростью, выражаемой двузначным числом; monetary value; быть свойственным для ч-л; consumer expenditures; строить числовые показатели; издержки и выгоды; a variable; сравнивать ч-л в течение периода времени; index number; конкретные переменные; the Consumer Price Index (CPI); структура потребительских расходов; bundle of consumer goods; модель потребительского поведения; consumer durables; the Producer Price Index (PPI); розничный рынок; дефлятор ВВП; escalator clause; ползучая инфляция; стремительно развивающаяся инфляция; double digit rate; подгонять индекс под ч-л; hyperinflation; темпы инфляции; процент безработных; to average 5 per cent; колебаться в пределах от 13 до 20 процентов; социальные издержки инфляции; инфляционный период; устаревшая информация; использовать ресурсы для пересмотра цен; menu costs of inflation; искажать относительные цены; принятие экономических решений; to depress incentives to save; тормозить, задерживать; ожидания деловых кругов относительно возможного изменения конъюнктуры; capital accumulation; наличие источников привлечения средств; distortion costs of inflation; выплачивающий большую ипотеку домохозяин; the discomfort (misery) index; borrower; жить на твёрдый доход; пострадать от инфляции; трансфертный платеж; влечь за собой; price hikes; to anticipate inflation; операционные издержки; информация о ценах; to boost income; wage contract; выиграть от инфляции; ultimate lender; вкладчик; банковский вклад; mortgage payment.