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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

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measuring price changes and interest rates
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%

sidebar why aren t falling prices deflation good
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

three measures of inflation
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)

on cpi total and core rate
ON CPI – TOTAL AND CORE RATE

TOTAL – INCORPORATES ALL PRODUCTS AND SERVICES

CORE – EXCLUDES VOLATILE FOOD AND ENERGY PRICES

problems in measuring inflation
PROBLEMS IN MEASURING INFLATION

KEEPING UP WITH CHANGING BUYING HABITS

INCORPORATING NEW PRODUCTS AND SERVICES

ACCOUNTING FOR QUALITY CHANGES OF PRODUCTS AND SERVICES

interest rates again
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

inverted negative yield curve
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