In the following video series on inflation, we will examine some of the key ideas you
need to understand for the CIE syllabus.
In the next few minutes, we’ll look at the definition and varying degrees of inflation.
Inflation is a persistent rise in the price level over a given period of time.
The key parts of this definition are in bold.
The increase in prices must be persistent.
Also, it can be general, which means not all goods and services will become more expensive,
but many will.
The price level consists of the overall level of prices in an economy, which we’ll explain
further later in this series.
Finally, as with most economic data, we measure inflation over a given period of time.
Next we’ll examine some key terms describing the different degrees of inflation.
It is argued that low and stable inflation is good for an economy.
To understand why, you have to think about the role of the central bank and how strict
their monetary policy would be if they targeted a 0% inflation rate.
The natural workings of economic growth would drive increases in the price level and by
enacting policy to limit growth, there may be too tight of a leash on the economy.
We’ll delve into this “leash” when we study monetary policy later in Unit 5.
The central banks of the US and UK officially target a 2% inflation rate and conduct monetary
policy to achieve it.
For now, you’ll need to understand at a basic level why some inflation is acceptable.
As we get deeper into the topic, you’ll see why levels higher than that can be harmful.
When inflation is rising at a rapid rate it is called hyperinflation.
This concept explains why a billionaire in Zimbabwe would be starving in 2012.
Hyperinflation is a period of rapid and out of control increases in the price level.
Common examples given in economics class are 1920s Germany and Zimbabwe (late 1990s - 2015).
This is the old one hundred trillion dollar note from 2008 in Zimbabwe.
In November 2008 the economy of Zimbabwe suffered an inflation rate of 79.6 billion percent.
That’s just the monthly inflation!
The annual rate of inflation in 2008 was 89.7 sextillion percent!
That’s 89,700 followed by 18 more zeroes.
An interesting chart from the Cato Institute shows that in mid November of 2008, prices
doubled every 24.7 hours.
To put that in context, if the US averaged a rate of inflation of 3% a year, it would
take approximately 24 years for prices to double.
If you want to read more about this and why the central bank increased the money supply
so rapidly, I’ll put a link to the article I’m referring to in the video notes.
In case you’re curious, after Zimbabwe abandoned their own currency, they started to use the
US dollar.
There are also two unique conditions that are related to falling inflation.
It’s important not to mix them up.
I’ll explain what they are.
First up, deflation.
Deflation is a negative rate of inflation.
It means the inflation rate has dropped below 0%.
While falling prices sound good from the individual standpoint, it’s important to consider it
from the macroeconomic view.
Falling prices will encourage consumers to delay purchases as they await even lower prices.
While they wait for prices to drop, producers will sense that their products are not selling.
As a result, they’ll cut production and reduce employment.
So you can see, at an economy-wide level, this could have serious consequences.
Disinflation is a significant decrease in the rate of inflation.
It’s not to be confused with deflation, or negative inflation.
Disinflation is significant reduction in the RATE of inflation.
Imagine inflation has been consistently 6% for a series of months, possibly years.
That 6% builds into consumer and business expectations.
If the rate slows down rapidly to 1.5%, then 1% on the way to 0.5% - disinflation is taking
place.
We consider the change in the rate, not necessarily the standalone figure.
So that wraps up this video on inflation.
In the next video we will take a look at how inflation is measured, using the consumer
price index.
As always, feel free to leave any comments below or email me at enhancetuition@gmail.com.
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I’ll see you in the next one.