A $550 Million Loaf of Bread?
If you were born within the last three decades in the United States, Canada, or many other developed countries, you probably have no real experience with a high rate of inflation. Inflation occurs when most prices in an entire economy are rising. There is also an extreme form of inflation called hyperinflation, which occurred in Germany between 1921 and 1928 and more recently in Zimbabwe between 2008 and 2009.
In November 2008, Zimbabwe had an inflation rate of 79.6 billion percent. In contrast, in 2012, the United States had an average annual inflation rate of 2.1%.
Figure 1. Big Bucks in Zimbabwe. This bill was worth 100 billion Zimbabwean dollars when issued in 2008. There were even bills issued with a face value of 100 trillion Zimbabwean dollars. The bills had $100,000,000,000,000 written on them. Unfortunately, they were almost worthless. Eventually, the country abandoned its own currency and allowed foreign currency to be used for purchases. (Credit: modification of work by Samantha Marx/Flickr Creative Commons)Zimbabwe’s inflation rate was so high that it is difficult to comprehend. So, let’s put it into context: it was equivalent to price increases of 98% per day. This means that from one day to the next, prices essentially doubled.
What is life like in an economy afflicted with hyperinflation? It is unlike anything you are familiar with. Prices for commodities in Zimbabwean dollars were adjusted several times each day. There was no incentive to hold on to currency since it lost value by the minute. People spent much of their time trying to get rid of any cash they acquired by purchasing whatever food or other commodities they could find.
At one point, a loaf of bread cost 550 million Zimbabwean dollars. Teachers were paid in the trillions per month; however, this was equivalent to only one U.S. dollar per day. At its peak, it took 621,984,228 Zimbabwean dollars to purchase one U.S. dollar.
Government agencies had no money to pay their workers, so they began printing money to cover expenses rather than raising taxes. As prices soared, the government enacted price controls on private businesses, leading to shortages and the rise of black markets. In 2009, the country abandoned its currency and allowed foreign currencies to be used for transactions.
Inflation has consequences for all economic agents, affecting lenders and borrowers, wage earners, taxpayers, and consumers alike.
Tracking Inflation
Dinner table conversations where you might have heard about inflation usually involve reminiscing about when 'everything seemed to cost so much less.' You might hear someone say, 'You used to be able to buy three gallons of gasoline for a dollar and then go see an afternoon movie for another dollar.'
Table 1 compares the prices of some common goods in 1970 and 2014. Of course, the average prices shown in this table may not reflect the prices where you live. For example, the cost of living in New York City is much higher than in Houston, Texas. In addition, many products have improved over recent decades. A new car in 2014—equipped with anti-pollution features, safety gear, computerized engine controls, and other technological advances—is a more advanced (and more fuel-efficient) machine than a typical 1970s car. So, older and newer products are not completely comparable.
However, put details like these aside for a moment and look at the overall pattern. The primary reason behind the price increases in Table 1—and in the prices of many other products in the economy—is not specific to the market for housing, cars, gasoline, or movie tickets. Instead, it reflects a general rise in the overall level of prices.
In 2014, one dollar had about the same purchasing power in overall terms of goods and services as 18 cents did in 1972, due to the amount of inflation that occurred over that time period.
| Table 1. Price Comparisons, 1970 and 2014 | ||
|---|---|---|
| Items | 1970 | 2014 |
| Pound of ground beef | $0.66 | $4.16 |
| Pound of butter | $0.87 | $2.93 |
| Movie ticket | $1.55 | $8.17 |
| Sales price of new home (median) | $22,000 | $280,000 |
| New car | $3,000 | $32,531 |
| Gallon of gasoline | $0.36 | $3.36 |
| Average hourly wage for a manufacturing worker | $3.23 | $19.55 |
| Per capita GDP | $5,069 | $53,041.98 |
Moreover, the power of inflation affects not only goods and services but also wages and income levels. The second-to-last row of Table 1 shows that the average hourly wage for a manufacturing worker increased nearly sixfold from 1970 to 2012.
Sure, the average worker in 2012 was better educated and more productive than the average worker in 1970—but not six times more productive. And while per capita GDP increased substantially from 1970 to 2012, is the average person in the U.S. economy really more than eight times better off in just 42 years? Not likely.
A modern economy includes millions of goods and services whose prices are constantly shifting with the breezes of supply and demand. How can all of these individual price changes be boiled down to a single inflation rate?
As with many problems in economic measurement, the conceptual answer is fairly straightforward: the prices of a variety of goods and services are combined into a single price level (or price index), and the inflation rate is simply the percentage change in that price level. Applying the concept, however, involves some practical difficulties.