Taking a Closer Look at Inflation

Many people will tell you that inflation is complicated. And while that is definitely the case, there are some ways that you can start to look at this in order to get a better understanding of all of it as well.

Think about a balloon. When you inflate it, it gets bigger. Now, when you blow up a balloon, it gets bigger. When prices of different products inflate, they obviously get bigger. Now, inflation is like that balloon. Say that I have a dollar. You ever hear people talk about “the old days” where they could get a bottle of soda for a quarter or go the movies for a nickel? It’s not like that anymore from inflation.

Inflation is calculated using something called the Consumer Price Index (CPI). Economists choose a year (the current year they are using is 1984) and they use the dollar’s worth that year as a base. They then compare the prices of items between that year and what is currently the price of an item and plug them into a formula.

For example:

Let’s say that I buy a half of a gallon of milk at the store. Nowadays, you spend about $2.50 to 3 dollars on that. Say that if I had bought that same half gallon of milk in 1984, it would have only been $1.25. So, I’m paying $.75 more for the same half gallon of milk, which is the change in the CPI. I would then take that $.75 and divide it by the total it cost during the year that the price was higher, which is $2. The rate of inflation is about 37.5%. Inflation is not necessarily good, especially if it happens drastically. Drastic inflation can cause deflation, which can be incredibly harmful to the economy.