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Inflation

What is Inflation?

Inflation means rising prices on average. There are three ways of measuring this.

Consumer Price Index (CPI)

The CPI uses a basket of goods (food, housing, clothes, transportation, recreation), and looks at the change in price since the base year. A big problem with this is that not everyone purchases the same products. For example, people in California use more gasoline than people in other places. Also, students, whose main consumption is tuition, are completely disconnected from the “typical consumer.”

Producer Price Index (PPI)

Measures prices of goods sold by domestic producers

GDP Deflator

Nominal GDP/Real GDP. Straight up measures total inflation.

Effects

When inflation is high, that means the government is not producing at its fullest potential, decreasing the production possibility frontier.

Additionally, they can be very damaging to someone planning retirement plans. People on fixed incomes are severely hurt. Additionally, inflation may affect your tax bracket, capital gains taxes, or other financial aspects.

Demand

Unemployment