Why prices increase, even when inflation falls?

Question

Go to your great grandmother and tell her how much
macroeconomics you have learned. She says “These macroeconomists
claim that inflation is falling but when I go to the market every week I see increasing
prices. They don’t know what they are talking about.” Give her an answer, keep in mind that she doesnt know economics, answer simply.

Answer 1

Inflation is an average of the goods and serviced that a typical consumer buys, but what you buy every week is most likely food. Food prices are going up much faster than the average of everything right now, in part because it is winter and in part because of the diversion of part of the corn crop to bio-fuels and increased exports to china.

Answer 2

Every now and again this occurs when Deflation is the growing influence in an economy that has experienced significant inflation for an extended period. Inflation starts at the upper levels of a society, but deflation starts on the lowest levels. For example, the Great Depression. The upper crust experienced increasing inflation and rewards for speculative activity while the lower levels were being hammered by increasing deflation in the years 1919 to 1929. The end result was economic collapse and deflation for all the society. Understanding this is how Nicholai Kondrattieff predicted the depression period in the 1930s at a conference of economists in Chicago in 1925.
Don't panic, although this may look suspiciously like our current situation, I have studied this for years. But I was wrong in 1987 when Volker and Greenspan successfully stopped the world economy from collapsing, so we may get away with this again. On the other hand, it is possible that what changed is that the phenomenon Kondrattieff was observing as a business cycle has come unstuck from the farm-life driven solar cycle and is now operating as a three generational transfer of information cycle, since generations and the transfer of power from one to the next have actually grown longer than the 20 years the biologists use. If that is true, we are right on track for another big collapse. Be a realist, plan for the worst, hope for the best.

Answer 3

Well when one says inflation is falling, it usually referes to the rate of price growth is decreasing. Prices still go up, just more slowly. If prices were coming down, that would be called deflation.

Also, inflation numbers track everything that a consumer buys. In the past couple of years, gas and food have gone up in price much faster then the average, so it may seem like prices on average are goign up faster then the inflation data tells you. Other things such as clothing and consumer electronics have come down a good amount in recent years, for example.

Also, you cant always equate a higgher price = inflation. Products improve, so your getting more bang for your buck. A Ford Explorer costs a lot more then a Model T did, but the whoel price difference is not inflation. A lot of it is that you are now buying more car. Teh same goes for health insurance. Health insurance today covers a lot more drugs and procedures then it dd 30 years ago, as technology has improved, so all of the price increase in health costs has not been just inflaton; you get more out of your insurance now.

I hope that helped.

Answer 4

Even without inflation, price change. Supply shifts to the left or right, demand shifts to the left or right, or the government levies a tax. Inflation is the over-all rise of ALL prices. Inflation isn't falling, however. Nor or economist saying it is. Deflation is worst than inflation, actually. Inflationary cost are mainly disturbances in adjusting to the change, not really the change itself. According to one theory, nominal changes in prices don't effect real variables because all prices, and hence wages, adjust as such. Healthy inflation is 2-4%. And, by no means is 0% inflation a goal. Moderate inflation is good because more money means more demand (the short-run trade-off between inflation and unemployment)

Answer 5

By definition, if there is inflation, prices are going up. If inflation is falling, they are just not going up as quickly. Right now, the biggest cause for falling inflation is the decline in housing prices. That is why inflation overall can be falling while prices for gas, medical care, and other goods and services climb at faster rates. In the latest release, the Bureau of Labor Statistics reports a 21.4% increase in energy prices (due to rising oil prices) over the past year, but only a 3.1% increase in housing prices and a slight decline in clothing prices.

Answer 6

If inflation is falling, it doesn't necessarily mean that prices will decrease. This is mostly because inflation falls remain in the positive numbers. For example if inflation falls from 8% to 3%, there is still inflation growth of 3%. (Prices keep rising, but now, at a lower rate)


If inflation falls from positive growth to a negative figure, then and only then will prices fall. So for example if inflation falls from 3% to -2%, the prices in the shops now begin to fall, because economic growth has become negative.

This is called deflation and causes the economy to shrink.

Answer 7

frequently no. yet there are distinctive techniques of measuring inflation an all have some kind of averaging so the charges of specific products of centers may be shifting interior the alternative direction to the conventional.

Answer 8

It is called the "ratcheting effect" prices on most non-commodities will only go up but not down, that is why inflation is dangerous.

Answer 9

you would have to differentiate between short-run and long-run effects. it takes time for prices to fall even though we might be in a deflation. But time evens things out eventually.

Answer 10

I guess Granny hasn't been shopping for GPS navigation devices, TVs, or DVD players.