Inflation
Introduction
Are you aware of any products that have become more expensive in the last few years? Make a list of the ones you can think of.
Watch the video ‘Price stability: why is it important for you?’ by the European Central Bank (ECB). The two main characters can’t buy anything. Give a brief explanation as to why.
Towards the end of the video an elderly lady complains about inflation. Explain her problem in detail using the words ‘prices’, ‘goods’ and ‘pension’.
What is inflation?
When an economy sees a general increase in prices, this is called inflation. This occurs when the money supply has increased too much in relation to the production of goods.
A word is missing in each field in the chart below. Fill in the blank spaces!
| A | |
| B | |
| C |
The chart below describes the development of inflation in Switzerland from 1970 to 2022. Mark the statements which are correct.
How do you measure inflation?
This text and the following video explain how inflation is measured. Read the text carefully before watching the video ‘The Consumer Price Index at a glance’ by the Swiss Federal Statistical Office (SFSO).
The change in inflation is expressed as the inflation rate (or rate of inflation). The inflation rate indicates to which extent the general price level has risen or fallen during a given period.
In Switzerland, the price level is calculated on the basis of a basket of goods that represents the regular consumption of a typical household. In order to measure the development of inflation, the current price for the basket of goods is compared to the price for the same basket of goods in a predefined base year.
This results in what is known as the consumer price index (CPI). The inflation rate then corresponds to the percentage change in the CPI over a specific period. For example, the annual inflation rate reflects the change in the CPI compared to the CPI value one year earlier.
Put what you have just read into context by completing the diagram below.
Select the appropriate term from the dropdown.
A =
B =
C =
D =
Calculating the rate of inflation (for KV only)
For this task, both the formula for calculating the consumer price index and for calculating the rate of inflation are important. These are:
Table 1 below shows a selection of the average monthly expenditure of a person for various years. For the sake of simplicity, imagine that this is all of a person’s consumer spending. Under this assumption, a price index calculated from this corresponds to the national consumer price index (CPI).
Table 1: Sample shopping basket with monthly expenditure of one person (selected product groups) in CHF
|
2011 |
2014 |
2017 |
2020 |
|
|
Take-aways and canteens |
118.50 |
105.40 |
100.35 |
79.90 |
|
Clothing and footwear |
235.40 |
217.05 |
191.65 |
138.20 |
|
Sport, relaxation and culture |
184.15 |
189.55 |
179.45 |
140.20 |
|
Mobile phone |
67.60 |
76.60 |
75.65 |
69.75 |
|
Rent including utilities and energy bills |
1378.90 |
1375.25 |
1318.40 |
1325.95 |
|
Beer and cigarettes |
49.65 |
42.10 |
47.75 |
44.70 |
|
Glasses and contact lenses |
23.85 |
26.50 |
18.90 |
17.45 |
|
Transportation (public transport, planes, taxis) |
10.60 |
10.10 |
10.45 |
5.70 |
|
Hairdresser and personal care |
53.00 |
50.80 |
47.80 |
41.05 |
|
Total expenses |
2121.65 |
2093.35 |
1990.40 |
1862.90 |
Source(s): SFSO Detailed Household Budget Survey: 2006–2020 (available in German only, 22 November 2022)
Enter the total expenditure for each year shown in the corresponding fields in table 2.
Calculate the price index (CPI) and the inflation rate for the years 2014, 2017 and 2020. Use the formulas for calculating the price index and the inflation rate as well as the information on the price level (= total expenditure) in table 1. Please use 2011 as the base year. 2011 is also date 0, the other three years are date 1. Enter your results in table 2.
Table 2: Calculating the consumer price index for 2011, 2014, 2017 and 2020
|
|
2011 |
2014 |
2017 |
2020 |
|
Total expenditure, in CHF |
|
|
|
|
|
Consumer price index (CPI), in points |
100 |
|
|
|
|
Rate of inflation, in percent |
– |
|
|
|
Calculation (approach):
CPI, in points (cf. formula):
CPI 2014 =
CPI 2017 =
CPI 2020 =
Rate of inflation, in percent (cf. formula):
Inflation rate 2014 =
Inflation rate 2017 =
Inflation rate 2020 =
The results from the 2022 Household Budget Survey are not yet available. Assume that the total expenditure of the sample shopping basket for 2022 is CHF 1,915.05. Use this information to calculate the CPI and the inflation rate for 2022. Please use 2020 as the base year.
CPI 2022 =
Inflation rate 2022 =
What do the inflation rates you calculated in tasks b) and c) tell you? Complete the following statements:
‘The inflation rates in table 2 show that you had to spend on the sample basket of goods in 2014, 2017 and 2020 than in 2011.’
‘The inflation rate for 2022 shows that you had to spend on the sample basket of goods in 2022 than in 2020.’
Who is most affected by inflation and how badly?
The chart below shows how much more households had to spend of their disposable income in October 2022 because goods and services had become more expensive. First look at the chart and then and check the boxes of the statements that are correct.
The chart below provides some indication as to why inflation does not affect all households equally. First look at the chart and then and check the boxes of the statements that are correct.
Based on tasks a) and b), what does the Swiss consumer price index (CPI) tell us about how expensive life is for Swiss households? Check the boxes of the two correct statements.
Give an example of the two findings from task c).
Consequences of strong inflation or deflation
A low and steady inflation rate between 0% and 2% is normal and has very few negative effects. But what negative effects might occur if inflation is high or unpredictable?
Read the instructions for task b) and then watch the CNN video ‘IMF: Venezuela’s inflation to hit 1,000,000%’.
Name at least three consequences of high inflation shown in the video.
The opposite of inflation is known as deflation. Fill in each of the gaps in the text with one of the following terms:
financial and economic crisis, lower, negative inflation, prices for goods and services, prolonged, short, tricky
periods of are unproblematic for an economy. Deflation, on the other hand, is . It refers to a trend driven by corresponding expectations towards ever and lower . Deflation is particularly dangerous when it occurs together with a , as was the case in the severe global economic crisis of the 1930s, also known as the Great Depression.
Purchasing power of income
Select the term you find appropriate from the dropdown.
The sample basket of goods in task 4 was 100 years ago.
Average wages were 100 years ago.
Does this mean we are now worse off than 100 years ago? Fill in the gaps in the text with one of the following terms:
decreased, increased, less, lost, more, more expensive, wages
The price level in Switzerland has increased more than tenfold over the past 100 years. This means that the shopping basket of a typical household has become more and and money has in value. However, this does not mean that we are worse off today than we were 100 years ago. As the price of food, clothing, housing and transport have risen, so have . The average income of private households has increased around twenty-fold since 1939 – i.e. significantly more than prices. This means that we can buy more today than our ancestors could 100 years ago.
Keep in mind:
If incomes rise faster than prices, you can buy with your income than before. In other words, purchasing power has over time.
If prices rise faster than incomes, you can buy with your income than before. Purchasing power has .
Read the information box and example 1 carefully. Then calculate the missing figures in the table below.
Example 1
In 2021, Johannes B. earned CHF 5,000 per month. At the end of the year, he received a salary increase of CHF 500. In 2022 he therefore earned CHF 5,500 per month. In the same year, prices increase by an average of 1%. His income therefore increased by 10%, while prices only rose by 1%.
This means:
Nominal wage: +10%
Rate of inflation: +1%
Real wage: +9%
His purchasing power has gone up by 9%.
Nominal wage
= pure monetary amount of income
Real wage
= nominal wage adjusted for inflation
| Example 2 | Example 3 | Example 4 |
| Nominal wage: +1% | Nominal wage: | Nominal wage: +4% |
| Rate of inflation: +2% | Rate of inflation: +1% | Rate of inflation: |
| Real wage: | Real wage: +2% | Real wage: +5% |
| Purchasing power has . | Purchasing power has risen by 2%. | Purchasing power has risen by 5%. |
In task 5 you learned some reasons why households are affected differently by inflation. In addition to these reasons, which factor learned here in task 7 also plays an important role?
