How Do Changes in the Inflation Index Chart Affect Consumer Prices and Employee Incomes?


Quick Answer

When inflation is high, consumer prices rise and employee incomes may fall. The opposite is true when inflation is low, as consumer prices are lower and employee income often increases.

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Full Answer

The term "inflation" refers to the change in the value of the dollar and the amount of goods that can be purchased with that dollar. The higher the inflation rate, the less a dollar is worth, and vice versa. Therefore, when inflation increases, businesses increase prices accordingly. One might notice the everyday effects of this when gas prices, the price of eggs or a gallon of milk rise, but inflation increases also affect the cost of bigger purchases, such as houses and cars.

As for employee incomes, many must compensate for lost purchasing power when inflation rates rise. Purchasing power is the amount of goods or services that one would be able to buy with one unit of currency. For example, if one's income were the same as the previous year but inflation has risen to 8 percent, said person will have lost 8 percent of their purchasing power, meaning that they would have to live on that much less than the previous year.

Numerous economists agree that it is good to have a small percentage of inflation, but rising prices and stagnant or lowering incomes often do not balance out.

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