VIDEO
HIGHLIGHT
Log InSign up
Measuring Inflation
SummaryTranscriptChat

Measuring Inflation

What is Inflation and How is it Measured?

Understanding Inflation

  • Inflation occurs when the average price level of goods and services rises, akin to an elevator going up.
  • The average price level is measured using a price index, which represents a large basket of goods and services.

Price Indexes

  • Different price indexes exist based on various baskets; the Consumer Price Index (CPI) reflects thousands of consumer purchases in the U.S.
  • The CPI uses a weighted average, meaning significant items like housing have more impact on inflation calculations than minor items like toothbrushes.

Calculating Inflation Rate

  • The inflation rate is determined by the percentage change in the CPI over time, typically annually.
  • For example, from 1973 to 1974, the CPI rose from 44.425 to 49.317, resulting in an inflation rate of 11.01%.

Historical Context of U.S. Inflation

  • Historical data shows that U.S. inflation peaked around 1980 at over 14% per year but averaged about 2.5% for many years afterward.
  • Comparatively, Venezuela's inflation rates soared dramatically in recent years, reaching estimates of 500% in 2016.

Future Discussions on Inflation

Playlists: Economics [Intermediate] Pt.1 Principles of Economics: Macroeconomics Unit 7: Inflation and Quantity Theory of Money
Video description

Inflation is common in a modern economy. Shifts in supply and demand for goods and services cause prices to change accordingly. When the average level of prices rises, that’s inflation. It means that you’ll need more money to purchase the same stuff. Inflation in the United States can be measured using the Bureau of Labor Statistics’ Consumer Price Index (CPI) – a weighted average of the price increases. We can calculate the inflation rate by the percentage change in the CPI over a given period of time. How much do prices actually change? Well, using FRED, we can see that, over the past thirty-three years, prices have more than doubled. That may seem like a lot. However, wages have also risen, on average, by more than prices during that time period. Inflation doesn’t necessarily mean that we’re worse off. The inflation rate in the United States has averaged at about 2.5% per year since 1980, which is fairly low and indicative of a stable economy. Prices may be increasing, but the changes are small. Wages have time to catch up. You can be confident that the $5 in your pocket isn’t going to be worth drastically less in a year. Let’s take a look at a different scenario -- one that’s playing in Venezuela right now. As the country faces an economic crisis, inflation is skyrocketing. Rates reached 180% in 2015 and have continued to rise since. 5 bolívar in your pocket could be worth less even by the end of the day. But Venezuela still doesn’t compare to the hyperinflation that Zimbabwe experienced in the 2000s, reaching dizzying rates of billions of a percent per month. (See MRU’s previous video for more!) While some inflation is perfectly normal, high rates of inflation make it difficult for consumers to use a nation’s currency. If the value is changing a lot by the week, day, or even minute, people don’t want to hold onto or accept the currency for goods and services -- leading to a full blown currency crisis. Up next, we’ll take a deeper dive into what causes inflation and its consequences. Subscribe for new videos: http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Interactive practice questions: https://mru.io/5d9 Next video: http://bit.ly/2jcmoUH