Inflation
Inflation describes the rise of the price of goods and services over a period of time.[1] Inflation is presented as a rate, if the prices of goods and services rise by an average percentage over a year then the inflation rate or rate of inflation is said to be that percentage.
The calculation of the inflation rate uses the change in the consumer price index (CPI) from one year to the next. The CPI consists of specified goods and services that the average family purchases, it can be anything from groceries to gasoline.[2] The CPI for a given year is expressed in the amount it costs to purchase the good and services it contains in dollars ($).
Assume that for 2014 the CPI is $150 and for 2015 the CPI is $175:
- Inflation Rate = <m>\frac{175 - 150}{150} \times 100 =16.6%</m>
Hyperinflation
Very rapid inflation is called Hyperinflation, specifically, when the rate of inflation is more than 50% per month. At this rate prices grow are 100 times higher than the previous year.[3] Hyperinflation must be measured monthly due to the dramatic rise in prices.
An example of a serious case of hyperinflation was in Germany after World War II, the case was so serious that Germans brought wheelbarrows of German Marks to buy a loaf of bread. Similarly in Hungary from August 1945 - August 1946 there was an inflation rate of 19,800% per month.[4]
Deflation
Just as inflation is the rise in the CPI, deflation is a fall in the CPI over time.[5] Deflation occurs when the rate of inflation falls below zero. In a deflation situation a consumer is able to buy more with less money where as in an inflation situation, a consumer can buy less with more money. After the Great depression of the 1930s, there was a period of deflation where the demand for investment was not being met and economic growth stalled.[6]
References
- ↑ A. B. Abel, et al. Macroeconomics, 6th ed. Toronto, Canada: Pearson, 2011, pp. 6
- ↑ R. A. Brealey et al. Fundamentals of Corporate Finance. Toronto: McGraw-Hill Ryerson, 2009, pp. 108-109.
- ↑ N.G. Mankiw et al. Principles of Macroeconomics 5th ed.. Toronto: Nelson Education, 2011, 250.
- ↑ A. B. Abel, et al. Macroeconomics, 6th ed. pp. 514.
- ↑ N.G. Mankiw et al. Principles of Macroeconomics 5th ed. pp. 241.
- ↑ M. S. Kumar et al. Deflation: Determinants, Risks, and Policy Options- Findings of an Interdepartmental Task Force. [Online], Available: http://www.imf.org/external/pubs/ft/def/2003/eng/043003.htm [Apr 30, 2003].