Inflation is a widely discussed topic because it has a huge effect on our economy. In fact, we can see the effect inflation has on our economy when we compare the prices of goods and services over the last fifty years. Inflation is when money loses its value over time, which results in an increase in the average level of prices. It is the opposite of deflation, which is a decrease in average prices. The study of inflation provides foundations to understanding the implications on currency exchange works and the stock market. Inflation is measured by the Consumer Price Index (CPI), which compares the price of a specific basket of goods from one year to another. A base year is selected for the calculation where the CPI for that year is 100 and all other years will be indexed accordingly. By looking at the index we get a better idea of the purchasing power we lose over time with the same nominal value of money.
Within the topic inflation important questions include: What level of inflation is acceptable? What policies should be implemented to prevent too high or too low inflation? What is the relationship between inflation and unemployment in reference to the Phillips Curve? Is inflation caused by changes in the interest rate or vice versa? How does inflation relate to the demand for money?