♪ [music] ♪ [Alex] In today's video,
we're going to take a closer look at what inflation is
and how it's measured. Now, shifts in supply and demand -- they're pushing some prices up and other prices down all the time. Let's think about
each of these prices like ping pong balls --
ping pong balls in an elevator. Now inflation is when
the average price is going up. Inflation is when
the elevator is going up. We measure
the average level of prices using a price index, the average price from a large
and representative basket of goods and services. There are different price indexes that are based
upon different baskets. The consumer price index, or CPI -- it's based on a basket
of thousands of goods and services which are bought by consumers
in the United States. And, it's a weighted average, so that an increase in the price
of a major item, like housing, that counts for more
than an increase in the price of a minor item like toothbrushes. The inflation rate
can then be measured as the percentage change
in the index over a period of time, say a year. So let's take a look
at the inflation rate in the United States,
as measured by the CPI. If we google "Inflation
United States FRED," we'll find a graph like this. The graph shows us the CPI. Now this index is defined,
so that the average price in the years 1982 to 1984 --
that's set equal to 100. In mid-2016, the index was 239. So that means that
over the past 33 years, prices on average
have more than doubled. Now that doesn't mean
that we're necessarily worse off today than in the past because wages have also gone up
over this time period. And, in fact, wages
have gone up, on average, by more than prices. By clicking on edit data series, we can change to an annual series. Now we can see that in 1973
the CPI was 44.425. And in 1974, the average price
of the CPI basket -- it had risen to 49.317. We can now calculate
that the rate of inflation over this year was 11.01%. The calculations can be
a little bit tedious. So let's have FRED do the work. We'll change the units
to percent change from one year ago. We now see
the annual inflation rate in the United States
from 1948 to 2016. Notice that in 1974
the inflation rate was 11.01%, just as we calculated. You can see that the inflation rate
increased in the United States in the 1960s and the 1970s, peaking around 1980
at a little over 14% per year. After 1980, inflation rates fell to an average of about 2.5%
for many years. Inflation even turned negative,
a little bit of deflation, very briefly
during the 2009 recession. Even in the 1970s,
the United States has had a relatively low inflation rate
by world standards. As a point of comparison,
let's consider Venezuela today. In Venezuela, the inflation rate
in 2015 hit 180%. And it didn't stop! It's estimated that in 2016, the inflation rate in Venezuela
will hit 500%, or even higher. Now even Venezuela
has a long way to go before it competes
with a hyperinflation leader like Zimbabwe, which as we know
from our previous video, Zimbabwe hit rates of billions
of percent per month at its peak hyperinflation. Okay. Now that we have a better idea about what inflation is
and how it's measured, we're going to look in more detail at the causes
and the consequences of inflation. That's up next. [Narrator] You're on your way
to mastering economics. Make sure this video sticks
by taking a few practice questions. Or, if you're ready
for more macroeconomics, click for the next video. Still here? Check out Marginal Revolution
University's other popular videos. ♪ [music] ♪
