"Inflation" refers to the usually gradual increase in the cost of goods and services over time. For example, a gallon of milk cost $1.65 in the year 1975 and an average of $2.51 in April 2018.
Economists measure the inflation rate using the Consumer Price Index, which tracks the shopping diaries of 24,000 people in the U.S. who report their purchases, and what they paid for them, including food and energy.
Another way to look at inflation is in terms of purchasing power: $1000 in the year 1975 would be equivalent to $4790 today. In other words, today's dollar is not worth as much as it was in the past.
As long as wages rise along with the rate of inflation, this is okay. But if inflation rises faster than wages, it becomes a problem. In some extreme circumstances, such as World War II in Greece, inflation soared, with the cost of goods doubling every few days.
This illustrates the law of supply and demand: if a commodity, like milk, becomes more scarce, the price will rise.
On the other hand, the more dollars that are available in a given time and place, the higher prices will be. This explains why buying a home will cost a lot more in San Francisco or New York than in Omaha. Wages are higher and there are many more people and dollars competing for a limited supply of properties.
One tool the government has for fighting against inflation is raising the cost of borrowing, or interest rates. For example, if the cost of borrowing to buy a car or a house increases, then fewer people will buy cars or houses, and (theoretically) inflation will slow.
https://search.ams.usda.gov/mndms/2018/04/DY20180427BRETAIL.PDF
https://www.bls.gov/bls/inflation.htm
https://www.marketplace.org/2018/03/21/economy/what-inflation-worry-federal-reserve-target/
Sunday, February 16, 2014
Explain inflation.
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