MEASURING PRICE CHANGES AND INTEREST RATES

1. MEASURING PRICE CHANGES AND INTEREST RATES INTERESTED IN HOW THE AVERAGE OF PRICES IS CHANGING – NOT HOW INDIVIDUAL PRICES ARE CHANGING INFLATION – AVERAGE IS RISING DEFLATION – AVERAGE IS FALLING DISINFLATION – AVERAGE IS RISING BUT AT SUCCESSIVELY LOWER RATES; EG, 6% TO 4% TO 2%

2. SIDEBAR – WHY AREN’T FALLING PRICES (DEFLATION) GOOD? NOT GOOD DURING A RECESSION – MAKES PEOPLE DELAY SPENDING HOPING FOR LOWER PRICES BAD FOR DEBTORS – DEFLATION INCREASES THE PURCHASING POWER OF DOLLARS AND THEREFORE MAKES BOTH DEBT AND DEBT PAYMENTS MORE EXPENSIVE

3. THREE MEASURES OF INFLATION AT CONSUMER RETAIL LEVEL – CONSUMER PRICE INDEX (CPI) AT BUSINESS LEVEL – PRODUCER PRICE INDEX (PPI) COMBINED CONSUMER AND PRODUCER LEVELS – “IMPLICIT PRICE DEFLATOR” (IPD)

4. ON CPI – TOTAL AND CORE RATE TOTAL – INCORPORATES ALL PRODUCTS AND SERVICES CORE – EXCLUDES VOLATILE FOOD AND ENERGY PRICES

5. PROBLEMS IN MEASURING INFLATION KEEPING UP WITH CHANGING BUYING HABITS INCORPORATING NEW PRODUCTS AND SERVICES ACCOUNTING FOR QUALITY CHANGES OF PRODUCTS AND SERVICES

6. INTEREST RATES AGAIN TEND TO BE “PROCYCLICAL” – HIGHER WHEN ECONOMY IS GROWING, AND LOWER WHEN ECONOMY IS IN A RECESSION LONG-TERM RATES SHORT-TERM RATES

7. INVERTED (NEGATIVE) YIELD CURVE LONG RATES ARE USUALLY HIGHER THAN SHORT RATES – MORE RISK BUT SOMETIMES SHORT RATES ARE HIGHER – CALLED AN “INVERTED (OR NEGATIVE) YIELD CURVE” – GOOD PREDICTOR OF AN ON-COMING RECESSION