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Inflated ideas: Teaching about inflation

As it's defined at, "Inflation is a sustained increase in the general level of prices, which is equivalent to a decline in the value or purchasing power of money. If the supply of money and credit increases too rapidly over many months, the result will be inflation. With inflation, a dollar buys less and less over time."

The Federal Reserve focuses on inflation as part of its monetary policy goal to maintain stable prices. (Other goals include promotion of sustainable economic growth and full employment.) The aim of monetary policy is to ensure that there is enough money in the economy to keep it growing but not so much that it overheats and causes inflation. Inflation—too much money chasing too few goods—creates an inefficient price system. It also distorts decision making, reduces productivity, and lowers the economy's long-term growth rate. As a result, living standards are lower for everyone.

Related Links
On this site:
Monetary Policy: Part Art, Part Science video (Part I: Introduction: Monetary Policy)
On the Web:
Order The Story of Inflation comic book
"What is a dollar worth?" inflation calculator (FRB Minneapolis)
Monetary Policy Basics
C'mon, share the wealth!
Let us know about tools, tips, or tricks you've used to teach your class economics or finance. Contact the Atlanta Fed education representative in your area. Your ideas could be featured in "Share the Wealth."

Educators in the Southeast have shared with us ways that they teach concepts related to inflation.

Kacee Harris, a teacher at Cumberland County High School in Crossville, Tennessee, first covers the basic concept of inflation and how the consumer price index (CPI) provides a good measure of inflation. She then breaks the students into groups of four. Each group receives a paper grocery bag with a staple good (milk, flour, sugar, eggs, etc.), the list of prices for that item over several years (pulled from the Bureau of Labor Statistics [BLS] CPI Web page), balloons, and poster-making supplies. The groups construct line graphs of the change in the price of their goods over time, inflate the balloons to different sizes reflecting the changes in price, and attach the balloons to the line graph. The activity illustrates that inflation is simply the increase of prices over time. The groups then present their finished posters to the class and report why they thought the prices had increased or decreased.

Maria Edlin, assistant director for the Middle Tennessee State University Center for Economic Education, uses the TV show "Antiques Road Show" to teach about inflation. Edlin shows video clips from the show and then has students use an inflation calculator to determine whether the show's participants made a good investment when they bought items. For example, say a person bought an item in 1965 for $150 and the item is appraised for $2,000 in 2009. Students determine whether or not this was a good investment by plugging the appropriate variables into the inflation calculator. As it turns out, the item was a good investment because, according to the calculator, the value of the item, based on inflation, should be $1,015 in 2009.

Mark Horsley, a teacher at Dickson County High School, in Dickson, Tenn., uses an inflation activity that centers on "The Twelve Days of Christmas" song. Using the BLS CPI Web page, students research the current and historical costs of the items in the song. They then use an inflation calculator to determine the relative value of the items and the percentage changes in prices. Additionally, students can practice using computer spreadsheets by entering the data and performing a variety of calculations.

For some of the many Federal Reserve print and electronic resources related to inflation, see the Related Links.

By Jackie Morgan, economic and financial education specialist, Nashville Branch

November 9, 2009