5 Inflation
5.1 tracking inflation
Review Activities
Practice Problems
Problem 5.1.1: The economic bureau of Gannondonia has decided that the average consumer in their nation consumes 10 sticks and 5 carrots. They have collected pricing data for the past three years that is given below. Use 2020 as the base year.
| Year | P(Stick) | P(Carrot) |
| 2020 | $1.00 | $2.50 |
| 2021 | $1.15 | $3.00 |
| 2022 | $1.20 | $3.00 |
- Calculate the basket price for each year.
- Calculate the CPI for each year.
- Calculate the inflation rate between 2020 to 2021 as well as the inflation rate from 2021 to 2022. Give to one decimal place.
Answers: $22.50, $26.50, $27.00; 100, 118, 120; 18.0%, 1.7%
Problem 5.1.2: The citizens of France consume only two goods: wine and cheese. The average citizen consumes 3 bottles of wine and 5 wedges of cheese. They have collected pricing data for the past three years that is given below. Use 2020 as the base year.
| Year | P(Wine) | P(Cheese) |
| 2020 | $3.00 | $5.00 |
| 2021 | $3.00 | $6.00 |
| 2022 | $4.00 | $7.00 |
- Calculate the basket price for each year.
- Calculate the CPI for each year.
- Calculate the inflation rate between 2020 to 2021 as well as the inflation rate from 2021 to 2022. Give to one decimal place.
Answers: $34.00, $39.00, $47.00; 100, 115, 138; 15.0%, 20.0%
Problem 5.1.3: Consider the nation of Behrendonia. The Economic Research Institute of Erie (ERIE) estimates that the average consumer purchases 5 quarts of Creamery Ice Cream, 12 gallons of Starbuck’s Coffee, and 10 Tim Horton’s Donuts. ERIE tracks the average price of each good from 2020-2022. The results are given below. Use 2020 as the base year.
| Year | P(Ice Cream) | P(Coffee) | P(Donut) |
| 2020 | $3.00 | $1.50 | $1.00 |
| 2021 | $3.25 | $1.50 | $1.10 |
| 2022 | $3.50 | $1.60 | $1.30 |
- Calculate the basket price for each year.
- Calculate the CPI for each year.
- Calculate the inflation rate between 2020 to 2021 as well as the inflation rate from 2021 to 2022. Give to one decimal place.
Answers: $43.00, $45.25, $49.70; 100, 105, 116; 5.0%, 10.5%
Problem 5.1.4: The economic bureau of the Democratic Republic of Mercyhurst has decided that the average consumer in their nation consumes 20 snaps, 10 crackles, and 30 pops. They have collected pricing data for the past three years that is given below. Use 2020 as the base year.
| Year | P(Snaps) | P(Crackles) | P(Pops) |
| 2020 | $2.00 | $5.00 | $1.50 |
| 2021 | $2.25 | $5.00 | $1.75 |
| 2022 | $2.75 | $5.25 | $2.00 |
- Calculate the basket price for each year.
- Calculate the CPI for each year.
- Calculate the inflation rate between 2020 to 2021 as well as the inflation rate from 2021 to 2022. Give to one decimal place.
Answers: $135.00, $147.50, $167.50; 100, 109, 124; 9.0%, 13.8%
Problem 5.1.5: Suppose that the average consumer in an economy purchases 10 apples, 5 bananas and 2 cantaloupe. Use 2020 as the base year.
| Year | P(Apple) | P(Banana) | P(Cantaloupe) |
| 2020 | $1.00 | $1.00 | $3.00 |
| 2021 | $1.00 | $2.00 | $4.00 |
| 2022 | $2.00 | $2.00 | $5.00 |
- Calculate the basket price for each year.
- Calculate the CPI for each year.
- Calculate the inflation rate between 2020 to 2021 as well as the inflation rate from 2021 to 2022. Give to one decimal place.
Answers: $21.00, $28.00, $40.00; 100, 133, 190; 33.0%, 42.9%
External Resources
Khan Academy: Introduction to Inflation
Khan Academy: Deflation
Khan Academy: Example Question Calculating CPI and Inflation
5.2 price indices
Review Activities
Practice Problems
No problems for this section.
External Resources
Khan Academy: Inflation Data
Khan Academy: CPI Index
5.3 using the consumer price index
Review Activities
Practice Problems
Problem 5.3.1: The classic horror/suspense movie Psycho debuted in theaters on June 16th, 1960. It earned a total of $32 million in its release. The CPI in 1960 was 29.6 while the CPI in 2019 was 255.657. Based off of this information, calculate the “inflation-adjusted” box-office returns for Psycho. That is, how much would Psycho have earned if it was released in 2019?
Answer: $276 million
Problem 5.3.2: Being a millionaire has always been a milestone for wealth. But, due to inflation, it now has less significance. What is the equivalent of earning $1 million in 1915 (in terms of 2019$)? What is the equivalent of earning $1 million in 2019 (in terms of 1915$)? The CPI in 1915 was 10.1 and the CPI in 2019 was 255.657.
Answers: $25.3 million; $39,506
Problem 5.3.3: The price of a Commodore 64 computer (the best selling computer of all-time) in 1982 was around $595 (depending on the model.) The CPI in 1982 was 96.5 while the CPI in 2019 was 255.657. How much would the Commode 64 have cost in 2019?
Answer: $1,576
Problem 5.3.4: The minimum wage in 1974 was $2.00 per hour. What would that be worth in 2019 if the CPI in 1974 was 49.3 and the CPI in 2019 was 255.657? The minimum wage in 2019 was $7.25. What is the value of the 2019 minimum wage in terms of 1974 dollars?
Answers: $10.37; $1.40
Problem 5.3.5: The first Toyota Corolla was manufactured in Japan in 1966. The average price of a new Toyota Corolla in 2019 was $19,400. If the CPI in 2019 was 255.657 and the CPI in 1966 was 32.4, what was the price of a 2019 Corolla be in 1966$?
Answer: $2,459
Problem 5.3.6: Below are a variety of movies and their initial domestic box office values, the year of release, and the CPI in the given year. Order the movies from smallest to largest domestic box office when adjusted for inflation. The ranking given is where the movie ranks in the top 50 box office of all-time not adjusted for inflation. Note: For simplicity of solution, I will convert all box office values into 2019$ though you could convert into any year that you wanted. The ranking would still remain the same.
| Rank | Movie | Year | Box Office | CPI |
| 1 | Avengers: Endgame | 2019 | $2.80 billion | 255.657 |
| 2 | Avatar | 2009 | $2.79 billion | 214.537 |
| 3 | Titanic | 1997 | $2.19 billion | 160.500 |
| 13 | Harry Potter; DH Pt. 2 | 2011 | $1.34 billion | 224.939 |
| 27 | LOTR: Return of the King | 2003 | $1.12 billion | 183.960 |
| 40 | Jurassic Park | 1993 | $1.03 billion | 144.500 |
| 49 | Lion King | 1994 | $968 million | 148.200 |
| NR | Gone with the Wind | 1939 | $189 million | 13.900 |
| NR | Star Wars IV: A New Hope | 1977 | $307 million | 60.600 |
| NR | Snow White | 1937 | $66 million | 14.400 |
Answer: See video.
External Resources
No external resources for this section.
5.4 inflation in the united states and the world
Review Activities
No review activities for this section.
Practice Problems
No problems for this section.
External Resources
No external resources for this section.