Inflation
What is inflation?
What exactly is inflation? Explain it in your own words. Do some research if you need to.
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.
The chart below describes the development of inflation in Switzerland from 1970 to 2022. What can you tell from the chart? Describe how the average inflation rate and the inflation rate fluctuations have developed over time.
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 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 the development of prices in Switzerland as measured by the Swiss consumer price index for the period between 2019 and autumn 2022. Use both ‘COVID-19’ and ‘War in Ukraine’ to describe the trend in three to four sentences.
The chart below shows the individual inflation rates for households with different incomes: The inflation rate for households with a low income, the inflation rate for households with a medium income, and the inflation rate for households with a high income. The period corresponds to that in task 4a). Summarise the main message of the chart in two to three sentences.
The chart below provides some indication as to why inflation does not affect all households equally. First look at the chart and then fill in the individual gaps in the text with one of the following terms:
average values, different, expenditure areas, more
The basket of goods on which the Swiss Consumer Price Index (CPI) is based is divided into 13 (main groups). Each main group is weighted according to its share of the household budget.
The of a Swiss household are used to calculate the CPI. This means that the larger the expenditure for a good or service in a typical Swiss household, the more important its price.
For example, if hand soap becomes more expensive, this has less of an impact on inflation than if bread becomes more expensive, because Swiss households typically spend on bread than on hand soap.
Inflation rates for households with incomes therefore differ because the households do not spend the same proportion of their household expenditure on each respective category.
Allocate the following inflation drivers to those households which are particularly affected by the price increases in the following categories of goods.
air transport; energy; food; fuel; household goods and services; purchase of cars, motorbikes and bicycles
| Low-income and middle-income households | High-income households |
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.
Why do the high inflation rates since the beginning of 2022 hit low-income households particularly hard? Explain the decisive reason in two to three sentences. Refer to the findings from task c) in your answer.
Based on tasks a) to f), what does the Swiss consumer price index (CPI) tell us about how expensive life is for Swiss households? Answer the question in one or two sentences and provide a specific example.
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.
The European Central Bank pursues an inflation target of below, but close to, 2% per year. The SNB defines price stability as an annual rate of inflation between 0% and 2%. Central banks clearly favour slightly positive inflation over negative inflation (deflation). Why is the target not just zero inflation?
The following text provides a schematic description of the mechanisms of deflation and slight inflation. Fill in each of the gaps in the text with one of the following terms:
bad, boosted, down, fall, rise, stalled, wait
When deflation occurs, customers expect prices to . If they are considering making a major purchase, they might choose to as the price will probably go . This behaviour is for companies as they are unable to sell their goods. The economy is . On the other hand, when inflation is slightly positive, customers expect prices to . It is therefore better to make a major purchase today than tomorrow. This behaviour is good for companies because they can sell their goods. The economy is .
Historical development of the CPI
Click on this link and set the start date to 1914 and the end date to 2021.
The start date automatically serves as the base time. Make sure you select ‘Year’ as the Indexation period. A line chart appears on the right-hand side of the screen. It describes the historical development of the Swiss consumer price index (annual average) from 1914 to 2021.
Looking at the diagram you have just created, write two to three sentences explaining how the CPI has changed from 1914 to 2021. Use the terms ‘price level’ and ‘basket of goods’ in your answer.
Click on the button to see a bar chart at the top right-hand corner. This chart shows the development of the annual inflation rate, i.e. the change in the CPI compared to its value one year before.
Read the following statements and check the box of those that are true. For each answer, explain your decision in one sentence.
As can be seen from the bar chart, Switzerland has experienced several inflationary and deflationary phases during the last 100 years. Do you see a connection between historical crises and periods of inflation? Discuss your thoughts with a partner and assign three periods of inflation or deflation to the corresponding historical events.
How do you assess the recent rise in inflation following the outbreak of the COVID-19 pandemic in 2020 against the background of other historical events and associated price increases? You can also use the various charts from the previous tasks to answer.
Purchasing power of income
Task 6 showed us that the general price level in Switzerland has risen noticeably over the last 100 years. This price increase means that money is losing value. In the past, CHF 100 could buy you a lot more than it can today. However, this does not mean that we are worse off today than we were 100 years ago. Because average incomes have risen faster than the general price level, people today can buy more goods and services with their income than they could 100 years ago. In other words, purchasing power has increased over time.
In order to describe the change in purchasing power, it is necessary to take both price trends (CPI) and income trends into account. A word is missing in each field in the chart below. Fill in the blank spaces!
| A | |
| B | |
| C | |
| D | |
| E | |
| F |
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 4 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?
Inflation returns
Read the statements in task b) and then watch the video by The Economist ‘Is higher inflation cause for concern?’
Judge whether the following statements are correct or incorrect. If you believe the statement to be false, justify your decision in one sentence.
