Good afternoon Ms. Teetaert and fellow classmates, last week we briefly touched on a topic called inflation. Inflation is the general increase in price and the decrease in the purchasing power of money. We learned that there are different types of inflation, such as hyperinflation, this means that the prices increases very quickly in a short period of time. Another term we learned was inflation rate which is the percentage in the price level of inflation over time, usually in an annual basis. We also talked about the measurement that we use to calculate inflation, and this is the Consumer Price Index (CPI), CPI is a measure that examines the weighted average of prices consumer goods and services, such as food, transportation and medical care.
The CPI inflation formula is:
CPI this period - CPI previous period x 100 = Inflation Rate.
CPI previous period
So for example:
CPI this period = 126 and the CPI previous period = 120
126-120 x 100 = 5%
120
It is impossible to measure the cost of living using CPI because each individual has a different spending pattern. CPI is a retail price index, it is not a good way to measure the cost of living because the measurements are biased for the following reasons,first is that the prices may increase due to the quality improvements of the products and second is that the weights that are used in the index are not up to date.
There are three events that causes inflation to occur:
- Cost-push
- Demand-pull
- Increase in money supply
So how does inflation relate to us in the real world?
A couple months ago the price of gas was $1.97 per litre and quickly went down to about $0.60 per litre in a couple of weeks. This also cause the Canadian dollar to decrease in value, while most people were happy with how cheap gas became, the currency exchange rate also decreased. For example; the Canadian dollar was equivalent to 35 pesos in the Philippines.
CITE:
Simpson, Stephen. "Macroeconomics: Inflation | Investopedia."Investopedia. About.com, 30 Mar. 2011. Web. 21 Mar. 2015. <http://www.investopedia.com/university/macroeconomics/macroeconomics6.asp>.
"Inflation Definition | Investopedia." Investopedia. N.p., 20 Nov. 2003. Web. 20 Mar. 2015.
