Share the Wealth: Ideas for Teaching Inflation
Inflation 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
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
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
Looking at the lowly postage stamp
Price x current-year CPI / Price in stamp year
You can also convert today's stamp price into 1983 dollars by reversing the formula:
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.
Where to find information
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