The price is the amount a buyer pays for a good or service. Infl ation is an increase in the general level of prices for goods and services. Infl ation refl ects how much prices are rising. When prices are rising faster than income, buyers lose purchasing power. In other words, the money workers earn will buy less as prices rise. Changing prices affect the purchasing power of both producers and consumers. The economy changes over time based on events and on habits and attitudes of producers and consumers. For example, an event such as a fl ood or hurricane that wipes out crops may affect prices. The supply of crops becomes small compared to demand, driving up price. As new digital devices, such as cell phones and video games, are invented, we are eager to buy them. Because demand for these devices is high, prices are also high.
Habits and attitudes explain how people react to changes in the supply of goods, world events, and their individual situations. We buy things without thinking about it to support our habits. As our habits change, so does our spending. Attitudes refl ect how people think about their future and about the product being sold. We ask ourselves questions such as: Will this product help me stay healthy? Is it worth the price? As consumers make choices and spend money, they affect prices and infl ation.
MEASURING INFLATION
Infl ation is measured by the U.S. government. The measurement toolused is called the Consumer Price Index (CPI). The CPI uses a list of goods and services that are commonly bought by consumers. The index measures changes in price from a base or starting point in time to the current time (or time of measurement). For example, if the price of an item was $1.00 in the base year and it is now $1.12, that is a 12 percent increase in the price. If the increase happened in just one year and it happened to all the goods on the list, the infl ation rate for that year would also be 12 percent.
INFLATION VS. PURCHASING POWER
As infl ation rises, the true purchasing power of each dollar falls. That means you must earn more to maintain the same standard of living. If you do not earn more, your standard of living will drop. Many people receive annual cost-of-living adjustments (COLAs) or pay increases from their employers to keep pace with infl ation. The COLA does not provide more purchasing power but keeps purchasing power equal to rising costs. On top of the COLA, workers are often given merit raises and or bonuses. These increases in income provide more purchasing power.
Habits and attitudes explain how people react to changes in the supply of goods, world events, and their individual situations. We buy things without thinking about it to support our habits. As our habits change, so does our spending. Attitudes refl ect how people think about their future and about the product being sold. We ask ourselves questions such as: Will this product help me stay healthy? Is it worth the price? As consumers make choices and spend money, they affect prices and infl ation.
MEASURING INFLATION
Infl ation is measured by the U.S. government. The measurement toolused is called the Consumer Price Index (CPI). The CPI uses a list of goods and services that are commonly bought by consumers. The index measures changes in price from a base or starting point in time to the current time (or time of measurement). For example, if the price of an item was $1.00 in the base year and it is now $1.12, that is a 12 percent increase in the price. If the increase happened in just one year and it happened to all the goods on the list, the infl ation rate for that year would also be 12 percent.
INFLATION VS. PURCHASING POWER
As infl ation rises, the true purchasing power of each dollar falls. That means you must earn more to maintain the same standard of living. If you do not earn more, your standard of living will drop. Many people receive annual cost-of-living adjustments (COLAs) or pay increases from their employers to keep pace with infl ation. The COLA does not provide more purchasing power but keeps purchasing power equal to rising costs. On top of the COLA, workers are often given merit raises and or bonuses. These increases in income provide more purchasing power.
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