Inflation

Things cost more today than they used to. In the 1920's, a loaf of bread cost about a nickel. Today it costs more than $1.50. In general, over the past 300 years in the United States the overall level of prices has risen from year to year. This phenomenon of rising prices is called inflation.

While small changes in the price level from year to year may not be that noticeable, over time, these small changes add up, leading to big effects. Over the past 70 years, the average rate of inflation in the United States from year to year has been a bit under 5 percent. This small year-to-year inflation level has led to a 30-fold increase in the overall price during that same period.

Inflation plays an important role in the macroeconomic economy by changing the value of a dollar across time. This section on inflation will deal with three
important aspects of inflation. First, it will cover how to calculate inflation. Second, it will cover the effects of inflation calculations using the CPI and GDP measures. Third, it will introduce the effects of inflation.