#4 Inflation

Inflation - rate of change of prices (basically how fast or slow a price of items go up)

Refers to the persistent increases in the general price level. In Micro, we are interested in prices of individual items such as goods & services like soap, burgers, etc. In Macro, we are interested in the Price Index on lots of goods and services. Calculations to come later.

Once again inflation = persistent increase in the general price level.

Types of inflation:
A) Hyper inflation - where prices rise extremely rapidly. The US inflation rate in 2007 was 3.5%, inflation in Zimbabwe in 2007, was 7,000% (yes, seven thousand!) PER MONTH!
B) Deflation = persistent decline in prices.
i) persistent decline in prices also lead to persistent decline in wages.

In the US, from 1800 to 1940, there was no real change in prices. (No inflation)
Since 1940, a sharp increase (persistent rise) in the general price level.

Why do we care? Well, the Federal Reserve cares. Inflation fears may lead to a rate cut. A rate cut may support the economy but it may push inflation even higher then again, higher interest rates may cause the economy to slow down even further. So how to deal with these issues? These are the things that the Fed worries about.

C) Core Inflation Rates - Also gives Fed the worries, because they don't want inflation to rise.