Types of Inflation

* Normal Inflation

- happens naturally in a growing economy

-> demand pulls at prices when people are doing well

- allows for wage and price adjustment

-> w/out inflation, any change is a big deal

-> w/ inflation, changes are always required and are less

contentious

-> mild wage-price spiral allows flexible adjustment

- naturally cuts into mortgages and loans

-> after a while, you pay your mortgage in less valuable dollars

-> loan rates already figure in inflation

* High inflation

- happens in overheated economy or when economy poorly run

-> oversupply of money

-> demand yanking prices up

-> oil shock or the like pushing prices up

-> wage-price struggle spirals out of control

-> government deficit creates too much demand, makes borrowing

dear

- rise in prices slams the poorly placed

-> poor get hammered as wages fall behind prices

-> fixed-income people see income lose value

- the wealthy or well-placed do well

-> land, investments, and the like rise with inflation

=> your mortgage payment becomes a joke

-> painful, but not devastating

- instability eventually eats away the entire structure of economy

-> production drops

-> people hoard goods and won’t spend

-> little point in working hard

* Hyper Inflation

- happens when economy is out of control

- loss of confidence in money hammers everyone

- fixed income & poverty disaster

- a few middle & rich protected if they can speculate

- economy spirals down as production grinds to a halt

- radical solutions required

-> Hitler’s Germany

* Deflation

- happens when economy is collapsing or super-stagnant

- poor and fixed income do OK as they get de facto raises

- banks are happy as they get repaid in more valuable dollars

- middle class gets killed as their loans increase in cost

- is extremely rare

* Zero Inflation (The Federal Reserve and Alan Greenspan)

- difficult with constantly growing economy

- requires labor discipline

- business can’t raise prices

- negotiation on wages and prices becomes a blood-sport

- banks dig it because loans keep value

- borrowers see no relief

- should help economy by providing predictable stability

Have the Students do the following Qs from the board on their own sheets of paper:

1) On a clear and large graph, show the growth of $12,000 at 3%, 12% and 100% inflation for 4 years. (This is 3 lines. The scale must be proportional. Dollars on the Y axis.)

2) A savings account presently pays about 2.75% in interest. Inflation is currently running at about 2.5%. If you have $1000 in the bank for five years, how much will you have in 5 years? How much will that be in real money?