Economic Impact of Inflation in the U.S.

Inflation is a process of steadily rising prices that results in a steadily diminishing purchasing power for a specified nominal amount of money. Inflation occurs where the increase in price is for a good or service for which there has occurred no substantial change in the characteristics of the good or service. Thus, an increase in the price of a potato from five-cents per pound to 10 cents per pound in a situation wherein the characteristics of the potato did not change would represent an inflationary increase in the price of potatoes. In contrast, an increase in the price of an automobile (from the same manufacturer and the same model) from $10,000 to $12,000 might not be inflationary if the automobile available at the higher price included a computerized ignition system, a computer-controlled braking system, and other technological enhancements not available on the earlier version of the automobile.

There are many measures of inflation. A well-accepted measure of inflation in the United States is the consumer price index (CPI). The CPI is available in several versions [e.g., all consumers or one of many sub-sets of consumers; and/or all

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ney, which in turn increased interest rates, and finally in turn created higher prices for most goods and services. 1991 The annual inflation rate in 1991 as measured by the CPI was 4.2 percent. One of the reasons that the rate of inflation dropped in 1991 was that the economy slipped into recession in 1990 and continued in recession in 1991. The recessionary environment affected consumer confidence, which in turn, depressed the demand for goods and services. Decreased demand translated into a smaller effect on prices. 1992 The annual inflation rate in 1992 as measured by the CPI was 3.0 percent. In 1992, the economy continued to be sluggish, there was a presidential election wherein the sitting president did not want to substantially increase federal government spending to stimulate the economy because, as a Republican, he was casting the Democrats as big spenders, and the economy was still digesting the effects of the Gulf War. Consumer confidence contributed a stagnant demand for goods and services and government spending dropped as the demand for military spending decreased. All of these factors contributed to reduced pressures on prices. 1993 The annual inflation rate in 1993 as measured by the CPI was 3.0 percent
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