Measuring Inflation

Inflation is common in a modern economy. Shifts in supply and demand for goods and services cause prices to change accordingly. When the average level of prices rises, that’s inflation. It means that you’ll need more money to purchase the same stuff.

Inflation in the United States can be measured using the Bureau of Labor Statistics’ Consumer Price Index (CPI) – a weighted average of the price increases. We can calculate the inflation rate by the percentage change in the CPI over a given period of time.

How much do prices actually change? Well, using FRED, we can see that, over the past thirty-three years, prices have more than doubled. That may seem like a lot. However, wages have also risen, on average, by more than prices during that time period. Inflation doesn’t necessarily mean that we’re worse off.

The inflation rate in the United States has averaged at about 2.5% per year since 1980, which is fairly low and indicative of a stable economy. Prices may be increasing, but the changes are small. Wages have time to catch up. You can be confident that the $5 in your pocket isn’t going to be worth drastically less in a year.

Let’s take a look at a different scenario -- one that’s playing in Venezuela right now. As the country faces an economic crisis, inflation is skyrocketing. Rates reached 180% in 2015 and have continued to rise since. 5 bolívar in your pocket could be worth less even by the end of the day.

But Venezuela still doesn’t compare to the hyperinflation that Zimbabwe experienced in the 2000s, reaching dizzying rates of billions of a percent per month. (See MRU’s previous video for more!)

While some inflation is perfectly normal, high rates of inflation make it difficult for consumers to use a nation’s currency. If the value is changing a lot by the week, day, or even minute, people don’t want to hold onto or accept the currency for goods and services -- leading to a full blown currency crisis.

Up next, we’ll take a deeper dive into what causes inflation and its consequences.

[moneybasketinvestments]

Im from Zimbabwe, once a trillionare😂😂

[mika]

Nice video, although I would like to comment one thing. On average, wages have gone up, yes. But the inflation adjusted wages of the lower percentiles (25th, to a lesser extent even up to 50th) have stayed quite stagnant since the 70's, hence the risen income inequality. In simpler words: richer half of the US can agree 100% with the video. Poorer half may say "lol my ages haven't gone up" and be correct. So, on average wages have gone up, but for the poorer half they've stayed about the same (inflation-adjusted).

[sadebashir]

This is my best channel. I learned alot from you videos. 100% better than my university. I respect you and salute.✋

[samiijay]

"Inflation is when the average price goes up, Inflation is when the elevator goes up" - did I hear that correctly?

[icmvbjw]

I wish you were my teacher back when I was still in school.

[sucuudfarah]

Thank you for supporting the knowledge and the philosophy of economics

[andrestifyable]

Hey, great videos! Thanks so much for your work =)

[teacherrussell]

@1:43 You can see that particular chart if you go to Edit Graph and select CPI for all urban consumers from the dropdown.

[Trail_Shreder]

Is it a problem that the "basket of goods" is constantly changing?

[SiyabongaProfessorMlalazi]

Zimbabwe is going back to that situation

[UnchainedEruption]

So the inflation rate is the rate of change of the consumer price index? Like the derivative or slope of prices?

[seanoleary]

hmm... wages have gone up on average by more than prices?... so are we averaging the ridiculous amount of money "earned" by the 1% along with all the myriad barely-scraping-by incomes of so many others in this country?

[cafeta]

4:11 venezuela: zimbabwe hold my beer!!

[kingsolomon]

2:26 no they have not, we are in a period of stagflation.

[meinradsocial]

Top 3 inflation cases (Zimbabwe is my home country):
1. Hungary (1946) __prices took 5-9 hrs to double
2.Zimbabwe (2008) __15hrs to double
3. Germany (1923)____24hrs to double

[aminmira]

CPI is not a good measure for inflation. Those data are not correct and not available for public to validate. In 2021 housing is up 15%, Car price up 20%, Grocery up 20%, food at restaurant is more expensive, Cost of living is up in every city, Stocks is up, bitcoin is up, gold is up, gas is up; then fed reports 2% inflation. Average inflation in the US has been around 10% and much higher this year. Affordability and real GDP per person is falling for decades. That's why, every other country seems to be catching up to the US economy.

[nestorenriquez]

Love this! Though I'm not an economist I'm learning!

[jordandieppa]

And how does PPI and Gab deflation factor in to the measurement of inflation?

[Vorpal_Wit]

I know a "Principles" video is not the place to discuss it, so I don't fault you, but people should be aware that after the Reagan admnistration, much of the drop in inflation can actually be attribited to changes in CPI reporting/weighting practices - the real rate of inflation in being disguised and misreported.

[emmanuelameyaw]

:)..economics never changes, it just gets more mathematical when you want to get a masters or phd