Is the Change in Inflation Good or Bad?

This activity can be used in Principles of Economics, Macroeconomic Principles, and Intermediate Macroeconomics courses. Simply adjust the difficulty level for your specific class and students. The exercise takes about 15-20 minutes and there are no class size limitations.

Overview

This exercise helps students improve their data fluency and analysis skills. They must find inflation data from an original source and then use that information to make a judgment. Changes in the inflation rate is something that students tend to struggle with because it's not immediately obvious what an increase or decrease in the inflation rate means – it depends on the underlying reasons for the change. It also depends somewhat on who you are – for example, an increase in the price of medical services likely falls harder on the elderly population. This activity creates an opportunity for students to develop critical thinking skills by applying some of their economic knowledge.

Expected Student Learning Outcomes

Students will seek out data on their own and learn how to properly analyze and interpret it. Students will move beyond a surface understanding of the inflation rate to a more complete conceptual knowledge of how changes in inflation impact different groups of people in the economy.

Information Given to Students

Individual: Go to the Bureau of Labor Statistics website and find the latest press release for the Consumer Price Index. What happened to inflation during the past month? State the exact percentage change for the overall change in inflation. Then, find the changes for at least 5 different product categories (e.g. healthcare).

Team: Rank the following groups of consumers (based on age) from 1 (least affected) to 5 (most affected). Then, be sure to support your rankings with data from the CPI press release.
a. 18-24
b. 25-34
c. 35-44
d. 45-64
e. 65+

Is the Change in Inflation Good or Bad? (Microsoft Word 2007 (.docx) 13kB Aug24 19)

Changes in the inflation rate are not universally good or bad – this is not immediately obvious to students. Of course, at a micro level, different people are affected in different ways by changes in prices. At a macro level, these micro changes combine to influence the broader economy through its impact on monetary policy. The data are available for students to calculate the inflation rate – which you can do in this exercise – but this is an opportunity to engage their critical thinking skills and go beyond rote calculations. This can also open the door to discussions about monetary policy and how it may affect different groups of people in different ways. The monthly change is usually more volatile than the yearly change, which could provide more room for discussion, but you are welcome to use a yearly change if you wish. At a minimum, you should convey to students that while monthly changes are important, we are usually more concerned (at least at a policy level) in trends over a few months or more.

In a follow-up quiz or exam, provide students with CPI data for a different time period and ask a similar, if not the exact same, question. You could also switch your focus from age groups to groups by education levels, urban vs. rural, or other options. Explanations should make clear that the students understand how changes in the price level are connected to the inflation rate, and how changes in the inflation rate affect both individuals and the larger economy. A more advanced question could ask the student to discuss the potential monetary policy response to the latest change in the inflation rate.

1. The IMF offers a great explanation of the basics of inflation. This is a good primer for students to read prior to class and as a supplement to (or instead of) their textbook.
2. BLS CPI Press Release: The latest numbers should be available here, but you can also navigate to historical numbers.