Email
Print Friendly
A A A

Education Resources

Share the Wealth: Ideas for Teaching Inflation

teaching inflationInflation was once famously described by President Ronald Reagan as being as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man. Inflation has the power to change market behavior and, when unrestrained, destroy economies. With the price of a gallon of gas hovering around $5 in California and television ads declaring that gas prices have doubled since 2009, inflation has been looming large in the national psyche. But are these rising commodity prices really signals of inflation?

The simple answer is no. Inflation is defined as a persistent increase in the economy's overall price level, a macroeconomic variable that captures changes for the economy as a whole rather than in just one individual category. For this reason, it is not accurate to call an increase in the price of gasoline "inflation." The latest statistics from the Consumer Price Index (CPI) show that inflation has risen only 1.7 percent over the last 12 months, which is less than the 2 percent inflation rate that the Fed targets in its monetary policymaking efforts.

Students often struggle to understand the difference between inflation and changes in the cost of living, and how to compare prices over time. For example, in 1995, when the majority of today's high school seniors were born, a gallon of gas averaged around $1.15. Before your students start building a time machine, it is important to help them understand exactly what inflation is and how to avoid comparing apples and oranges when looking at prices across time. Inflation may be half of the famous "misery index," but with the wealth of out-of-the-box resources and activities available to teach the subject, it can actually be fun to teach.

Traveling through time to compare prices
In a scene from the movie "Back to the Future," Marty McFly travels back to 1955 and is shocked to find that a nickel buys a cup of coffee and a movie ticket costs only 50 cents—real bargains compared to the prices in 1985, the year the movie was released. To show students how to really compare prices from the past, a bit of classroom time travel might be helpful. Post prices from the past on the board, preferably with several different time periods that you reveal one by one, such as 1965, then 1975, then 1985. Links to historical prices can be found on the Internet. (See below for suggested sources of information.)  Add period music to make the activity even more authentic.

Students might wish they could pay those prices today, but then ask them to guess the minimum wage from each of those years. Students can then calculate how many hours of work it takes to earn enough money to pay for a gallon of gas, a movie ticket, or a Hershey's bar. To translate these historical prices into today's dollars, use the CPI inflation calculator from the U.S. Bureau of Labor Statistics (BLS). (See below for the link.) You can reveal your translation to students during your "time travel," or you can have them calculate the values themselves using either the CPI inflation calculator or the formula used in the stamp exercise below.

You may want to also discuss other factors such as technology that have played a role in price changes—for example, technological advances have brought down the price of a washing machine and improved its features.

When the prices of certain goods rise, consumers often switch to lower-priced substitutes to stretch their dollars. The Personal Consumption Expenditure (PCE) Index captures this information, but the CPI, which measures inflation using a fixed basket of goods, does not. (Refer to the article in this issue of Extra Credit called "Introducing Inflation Indexes" for an explanation of the various measures of inflation, including the CPI and the PCE Index, and their similarities and differences.)

Going to the movies
It seems that every year, another blockbuster movie comes out that breaks box office records. "Avatar," "Titanic," the "Avengers"—they all brought in record receipts. More people must be going to the movies these days, right? Or maybe we just like movies more than in years gone by? The answer is a great way to teach students the difference between real and nominal prices. Direct them online to find the movies that were the highest grossing of all time, both in current dollars and adjusted for inflation. (Below is a link to a website that provides historical, inflation-adjusted movie prices.)

Students are fascinated by the list, often looking for their own favorite movies and wondering how others got there. The inflation-adjusted list brings many surprises, and can spark a discussion not only on how the price level has risen over time, but also on how technology has changed the ways movies are made as well as the demand for movies themselves, particularly in the theater.

Creating CPI and SPI baskets
Although the CPI is calculated using the prices of more than 200 categories of goods and services, you can have students create their own basket of goods and services—a so-called "Student Price Index," or SPI—and track the changes in their prices over the course of a semester. Baskets can consist of as few as five or as many as 10 to 20 items, and should include items whose prices would actually change over the time period under study and not online or catalog items. Because gasoline and food are items that students frequently choose, these items offer a good starting point for a discussion of the difference between core and headline inflation and the volatility of commodity prices. You can use this sheet to guide the assignment.

Looking at the lowly postage stamp
The cost for sending a piece of first-class mail is always rising… Or is it? Another good illustration of the difference between real and nominal prices and how prices have risen over time is the changing price of a U.S. postage stamp. To convert prices from earlier years to now, use this formula:

Price x current-year CPI / Price in stamp year
For instance, in 1983, a postage stamp cost 20 cents, which gives us this formula:

20 x 2012 CPI / 1983 CPI, or
20 x 230.379 / 100.2 = 45.98

You can also convert today's stamp price into 1983 dollars by reversing the formula:

45 x 100.2 / 230.379 = 19.57

Today's stamps are actually cheaper! The BLS's CPI calculator allows students to plug in prices and convert them to both present and historical values.

The St. Louis Fed offers an excellent extension activity that starts with a discussion of the price of a postage stamp. The activity includes an accompanying SMART lesson.

Where to find information
Here are some websites you and your class can use to gather some of the information used in these exercises:

More resources
If you are looking for more resources on teaching inflation, check out the very first edition of the Classroom Economist, where you will find videos, PowerPoint content, quizzes, SMART lessons, and more on the topic. Other recently released Federal Reserve resources on the topic include a podcast, a lesson on inflation measures using the FRED database graphing tool, a lesson about the Great Inflation and lessons learned, a mobile app, an animated video, and a free online course for your students.

For a listing of all Federal Reserve resources on inflation, go to www.federalreserveeducation.org, where a search for inflation will locate more than 60 items ranging from lessons and publications to technology-based learning and videos.

By Lesley Mace, economic and financial education specialist with the Jacksonville Branch of the Federal Reserve Bank of Atlanta

October 31, 2012

 

Related Links

Related Links on Other Sites