InflationEssentialsDefininginflationanditscousinsInflation.pdfVIP

Inflation?Essentials? ? ? Defining?inflation?and?its?cousins? ? Inflation? ? defined?as?a?sustained?increase?in?the?general,?or?average,?price?level? ? a?few?items?going?up?in?price?does?not?define?inflation? ? even?during?periods?of?inflation,?some?items?will?fall?in?price? ? Deflation? ? not?particularly?common?in?the?U.S.? ? we?experienced?significant?deflation?during?the?Great?Depression? ? Japan?has?struggled?with?deflation?since?the?1990’s? ? defined?as?a?sustained?decrease?in?the?general?price?level? ? actually?sounds?rather?nice,?but?isn’t? ? can?be?a?symptom?of?a?serious?problem?in?the?economy? ? Disinflation? ? defined?a?a?decrease?in?the?rate?of?inflation? ? it?doesn’t?mean?that?prices?are?falling? ? it?means?that?they?aren’t?rising?as?quickly? ? pretty?common?phenomenon? ? ? Why?is?inflation?bad?news?? ? Inflation?can?erode?purchasing?power? ? as?prices?of?goods?and?services?rise,?the?purchasing?power?of?a?given?amount? of?money?declines? ? purchasing?power?refers?to?the?quantity?of?goods?and?services?that?a?given? amount?of?money?will?buy? ? if?we?have?inflation?this?year,?a?$20?bill?in?your?pocket?will?buy?fewer?goods?at? the?end?of?the?year?than?it?did?at?the?beginning?of?the?year? ? Does?inflation?reduce?the?purchasing?power?of?your?wage/income?? ? that?depends?on?whether?your?income?remains?constant? ? there?is?a?tendency??for?wages?to?rise?when?the?prices?of?goods?and?services? rise? ? after?all,?one?can?think?of?the?wage?rate?as?the?price?of?labor? ? somewhat?of?a?horse?race? ? we?need?to?distinguish?between?nominal?and?real?wages/income? ? Nominal?income? ? simply?the?number?of?dollars?that?you?receive? ? inflation?doesn’t?directly?change?your?nominal?income? ? Real?wage/income? ? defined?as?the?purchasing?power?of?your?nominal?wage/income? ? inflation?certainy?can?affect?your?real?wage/income? ? if?prices?of?goods?and?services?increase?faster?than?n