UNIT TWO(3): INFLATION

• Inflation: A general rise in price levels 
• Inflation Rate = (New price index - Old price index / Old index price) X 100
• Reduces purchasing power of money
• When inflation occurs, each dollar of income will buy fewer goods than ever before

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• Consumer price index (CPI): measures the cost of market basket goods of a typical urban american family. 
• More than one item is a market basket of good
• CPI = ( cost of a market of goods in a given year / cost of a market of goods in a base year)
• An example would be:

• 3 CAUSES OF INFLATION:
  1. Government prints to much money.
  2. Demand for pull inflation - too many dollars chasing too few goods.
  3. Cost-push inflation (high production cost that increases prices)
  ex. Hurricane Harvey.

UNANTICIPATED INFLATION

• HURT by inflation: 
• Lenders (fixed rate) ex. car dealership, credit union/banking institution, landowner.
• People who are in a fixed income (people who receive social security or retirement)
• Savers
• HELPED by inflation: 
• The borrowers/debtors
• Business where the price of the product increases faster then the price of the resources
  ex. flexible income
• UNAFFECTED by inflation: 
• Arm - Adjustable rate mortgage
• People with salary, pension retirement, or social security that receive a COLA

• Nominal interest rate: unadjusted cost of borrowing/lending money
• Real interest rate: cost of borrowing/lending money which is adjusted for inflation.
• FORMULA: RIR = NOMINAL INTEREST RATE - INFLATION