GED Inflation Types and Calculations.pptx

Inflation

1. A Presentation on , Inflation Types and Calculations Understanding inflation types and their calculations is key to decoding the true cost of living and economic change. Presented by – Fahmid Hasan Fahim (1483)

2. Understanding Inflation Inflation is the rate at which the general level of prices for goods and services in an economy increases over time. When inflation occurs, each unit of currency buys fewer goods and services—meaning the purchasing power of money declines. According to Milton Friedman (Monetarist Economist), “Inflation is always and everywhere a monetary phenomenon.” It means that inflation results from a faster increase in money supply than in economic output. Reference : Friedman, M. (1970). The Counter-Revolution in Monetary Theory . London: Institute of Economic Affairs.

3. Demand-Pull Inflation Occurs when aggregate demand for goods and services in an economy outstrips the available supply, leading to upward pressure on prices. Cost-Push Inflation Results from an increase in the cost of production inputs, such as raw materials or labor wages, forcing businesses to raise prices to maintain profit margins. Built-in Inflation Arises from adaptive expectations, where workers demand higher wages to offset expected future price increases, and businesses raise prices in anticipation of higher labor costs, creating a wage-price spiral. Reference: Mankiw, N. G. (2021). Principles of Economics (9th ed.). Cengage Learning. Three Main Types of Inflation

4. Additional Inflation Types by Speed and Severity Creeping Inflation: A mild and predictable increase in prices, typically under 3% annually. It's often seen as a sign of a healthy, growing economy. Walking Inflation: Prices rise at a moderate but noticeable rate, between 3% and 10% annually. It can signal economic instability if not managed. Galloping Inflation: A rapid increase in prices, often exceeding 10% annually. This level of inflation can significantly disrupt economic stability and consumer confidence. Hyperinflation: An extreme and rare form where prices increase by 50% or more per month. It leads to a complete breakdown of the economy, as seen in 1920s Germany.

5. How Inflation is Measured Measures the average change over time in the selling prices received by domestic producers for their output. It reflects price changes from the perspective of the seller, often considered a leading indicator of consumer inflation. Consumer Price Index (CPI) Measures the average change over time in the prices paid by urban consumers for a fixed basket of goods and services. It's the most widely used indicator for cost-of-living changes. It's a primary measure of inflation. Producer Price Index (PPI) GDP Deflator: Measures the price change of all goods and services included in GDP. Unlike CPI, it isn’t based on a fixed basket and reflects price changes in the entire economy. Reference: Mankiw, N. G. (2021). Principles of Economics (9th ed.). Cengage Learning.

6. Inflation Rate Calculation Formula Inflation is typically measured using a price index, the most common being the Consumer Price Index (CPI). The CPI tracks the average change over time in the prices paid by consumers for a basket of goods and services. To calculate the inflation rate between two periods using CPI: Inflation Rate(%) = ( ) × 100% Suppose, The Consumer Price Index (CPI) for a country was 210 in the year 2020 and increased to 231 in the year 2021 . Calculate the inflation rate between 2020 and 2021. Now, Substitute the values: Inflation Rate = ( ) × 100% = ( ) × 100% = 10% The inflation rate from 2020 to 2021 is 10%.   Reference: U.S. Bureau of Labor Statistics (BLS). (n.d.). Consumer Price Index – CPI

7. CPI (Consumer Price Index) Scope: Includes categories like food, housing, clothing, transportation, medical care, education, and recreation. Use: Most commonly used to gauge cost-of-living changes and adjust wages, pensions, and tax brackets. Limitations: Based on a fixed basket of goods, so it may not reflect changes in consumer behavior or new products. PPI (Producer Price Index) Scope: Includes prices at different stages of production - raw materials, intermediate goods, and finished goods. Use: Often seen as a leading indicator of consumer inflation since price increases at the production level may pass on to consumers. Limitations: Doesn’t measure prices at the consumer level directly. GDP Deflator Scope: Includes Consumer goods and services, investment goods, Government services and export. Use: Useful for measuring inflation in a broad sense, including investment and government spending. Limitations: Not as timely or detailed as CPI or PPI; updated quarterly. Common Inflation Index in Details

8. Summary: Inflation Types and Calculation Inflation is a critical economic concept driven by demand-pull, cost-push, and built-in factors, alongside varying speeds from creeping to hyperinflation. The inflation rate, reflecting the average price increase over time, is precisely calculated using robust price indexes like CPI and PPI. Understanding these types and calculation methods is essential for sound financial planning and effective economic policy-making.

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