1. Using Cartoons to Teach About
By
Mike Fladlien

2. What is Inflation?
• Inflation can be defined as the overall general
upward price movement of goods and services in
an economy. (BLS.gov)
• The best measure of prices is the Consumer Price
Index or CPI. The Consumer Price Index (CPI)
program produces monthly data on changes in
the prices paid by urban consumers for a
representative basket of goods and services.
• The Producer Price Index, PPI, measures the
prices paid for intermediate goods.

3. All of Inflation’s Little Parts
• Each month, the Bureau of Labor Statistics
gathers 84,000 prices in about 200 categories
— like gasoline, bananas, dresses and garbage
collection — to form the Consumer Price
Index, one measure of inflation.
• This graphic shows the components of the CPI
broken down into categories for 2007-2008.

4. Historical Inflation
RateFRED data series (CPIAUCSL)
0.16
Inflation Rate
0.14
0.12
0.1
0.08
0.06
Inflation Rate
0.04
0.02
0
1960 1970 1980 1990 2000 2010 2020
-0.02

5. The Drought
A nation-wide drought will reduce the
amount of corn for consumption, Ethanol
production, feed for cattle, and all
products in which corn is used. The
supply curve for corn will shift to the left
which will increase prices. When the
resources used in a good increases in
price, economists call this cost-push
inflation.
Cost-push inflation refers to a general rise
in prices as aggregate supply shifts to the
left. In a study conducted by Hope
Jahren, the University of Hawaii
researcher found that over 500 fast food
items used corn.
According to Soyatech, corn is the most
used food staple
An increase in the price of corn could
lead to inflation as measured by the CPI.

6. Gas Prices
Higher gas prices can hinder an
economic recovery . As of this
writing, gas prices have climbed 30
cents over the last five weeks
according to this CNN Money report.
Arguably gas is an input into every
product. Gas moves goods along the
supply chain.
Gas allows consumers to consume
goods and voluntary exchanges can be
made. These voluntary exchanges
allow prices to be driven down to their
marginal cost.
When gas prices are high, the
economy doesn’t work efficiently.

7. Oil
This cartoon uses a play on words to
suggest that gasoline prices would be
lower if there were more domestic
drilling for oil. The toon also makes the
point that higher prices are depleting
personal savings.
These experts believe that drilling will not
lower domestic gas prices.
The supply of oil on the world market is
so enormous that domestic drilling in the
United States would do little to lower gas
prices. (The Washington Times).
Gas prices constitute only 5% of a
consumers budget. The smaller amount
of a budget that than item consumes the
more inelastic the demand. This
elasticity suggests that changes in gas
prices will result in higher prices.

8. In the Bag?
This cartoon suggests that the prices
of basic food items has increased
drastically because of the 2012
drought.
This inflation rate calculator shows
that the inflation rate is below
historical monthly averages since
2002.
Remember that inflation is rise in the
general price level. Some goods might
be increasing in price while others are
decreasing. The net effect of the
increases and decreases is the overall
inflation rate. There is also the
possibility of CPI bias.
The CPI doesn’t reflect the quality
improvement s, substitution effects, or
new innovations. A Federal Reserve
Paper explores the bias here.

9. Higher prices have an income effect
and a substitution effect. As food
prices increase in price relative to
other goods, consumers have to make
other consumption choices such as
how much to spend on
housing, education, and health care.
This cartoon implies that food prices
are high. Since people have got to
eat, other goods that satisfy a
consumers wants and needs go
without fulfillment. In the
end, inflation changes consumption
expenditures on many other goods.
This change in demand may result in
unemployment in industries that
consumers substitute away from.
Higher prices also rob consumers of
buying power. Higher prices act like a
wage cut.

10. Monetary Policy

11. Natural Disasters
The economy isn’t free from
exogenous forces. In this cartoon, the
drought of 2012 has hurt charitable
contributions. This suggests that
inflation hurts lower income earners
harder than higher income earners.

12. Fiscal Policy
When the government cuts
taxes, consumers have more
disposable income to spend. This
cartoon suggests that tax cuts will help
the economy out of a deep recession.
During a recovery, prices rise. Many
economists believe that there should
be a 2% inflation rate if the economy is
healthy.
A small amount of inflation shows
that consumer demand is strong and
presents profit opportunities that
encourage employment and
investment.

13. Hyperinflation
When a country experiences rapidly
accelerating inflation, the country is in
a period of hyperinflation.
The most notorious case was Germany
from 1919 to 1923.
More recently, Zimbabwe.

14. Monetary Policy
The Federal Reserve Bank can
indirectly control inflation through the
discount rate or the Fed Funds Rate.
The discount rate is the
interest rate that an eligible
depository institution is charged to
borrow short-term funds directly from
a Federal Reserve Bank.
The federal funds rate is the interest
rate at which depository institutions
actively trade balances held at
the Federal Reserve.
Raising either the discount or Fed
funds rate contracts the money supply
and brings the average price level
down.

16. Debtors
Debtors gain from inflation since they
pay back the principal with less
opportunity cost.

17. Real Money Balances
Money buys less; the cost of inflation
hurts children ; how come the income
earners wages haven’t kept up?
One way to show the effects of
inflation is to divide the nominal wage
by the price level. So if the nominal
wage rate is $10 and the price level is
5, then only $2 of real goods can be
purchased. When prices rise faster
than income, a families real buying
power decreases.

18. Creditors and Debtors
Inflation enriches debtors and the
expense of creditors as explained in
this article.

19. Inflation Bully
Inflation is a bully. Inflation is
personified here as shaking down the
consumer. At an annual inflation rate
of 8.3 percent, this would be
equivalent to a gallon of gasoline that
cost $3.45 costing $3.74. With an
inflation rate that high many home
owners with a variable rate would be
“upside down.”

20. MV = PQ
When a nation’s money supply
rises, it’s price level rises too. In
fact, Milton Friedman called for a
monetary rule in which the money
supply increased by 3% each year so
that prices would increase equally.
In the cartoon, the dollar buys less
foreign goods so the US dollar must be
rapidly depreciating.
If you want to measure the change in
prices, you will need to analyze the
Consumer Price Index, CPI.

21. Shoeleather Costs
When inflation is expected, the
nominal interest rate raises through
what economists call the Fisher Effect.
When the nominal interest rate is
relatively high, people hold less money
for transactions. As a result, they
make frequent trips to the bank to
withdraw money and in making the
trips, they wear out the leather on
their shoes.

22. Distributional Effects
This cartoon suggests that inflation
hurts everyone but the poor are hurt
the most.
Earners who are living on a fixed
income are also hurt. Perhaps these
earners live on a pension or income
from bonds.

23. Chopping Block?
This father can’t afford two of his
children so he’s letting them go.
Fortunately, families don’t mirror
businesses. But the cartoon raises a
question. How does an income earner
earn enough to provide for his family?
In periods of inflation, especially when
wages don’t keep up with prices, the
family has to make tough choices. This
Christian Science Monitor article
suggest that wages do not.
Economics is defined as how to satisfy
unlimited wants with limited
resources. Economics is often called
the dismal science for this reason.

24. Stagflation
Stagflation is an economic malady in
which there is simultaneous
unemployment and inflation.
In the United States the most notable
period of stagflation occurred the
1970s due to an adverse supply shock
when the price oil escalated.
The best policy response to a supply
shock is Laissez-Faire since most
supply shocks don’t last long.

25. Stagflation

26. Inflation Tax
When price rise, buying power falls.
Inflation acts like a tax on goods. The
tax isn’t collected at the cash register
but is a hidden tax as the purchasing
power of the dollar is reduced.
When the money supply is
increased, perhaps to monetarize the
deficit, prices increase. As prices
increase, the buying power of a fixed
assets such as a bond falls. So do
people on fixed incomes.
Inflation “taxes” those on fixed
incomes. Several links can be found
here, here, and here.

27. Inflation Tax

28. Seigniorage
The government can earn revenue
when it prints money to finance the
debt. This is called seigniorage.
A well written blog post can be found
here.
To monetarize the debt, the treasury
issues bonds and the central bank uses
open-market operations to buy the
bonds. If the government is running a
large deficit, it might resort to
seigniorage if it can’t obtain loans from
foreign investors. This might result in
hyperinflation.
Why is it cheaper the ride the bus than
ride the train during hyperinflation?
Because you pay at the beginning of
the ride when use ride a bus.

29. Business Cycles?
This cartoon suggests that policy
makers have to balance monetary
policy to stabilize the economy.
Fiscal policy suffers from lags so that
when spending kicks the economy has
already recovered and the effects are
inflationary. If contractionary policy is
enacted, fiscal policy can send the
economy into a recession.
But, does inflation usually follow a
recession? Evidence that some
inflation is necessary to boost
employment can be found in the WSJ
article.

30. Data
The empirical data shows that
since 1980 a run up on prices
is followed by a recession.
Some questions to ask are:
Did policy induce the
recessions?
What social forces contributed
to the price declines such as
housing bubbles.
This graph is taken from
SeekingAlpha.

31. • Two other problems
Bracket Creep or Tax
Distortion
associated with inflation
When an asset is sold, the seller pays
capital gains on the amount of the sale
are an arbitrary
over the purchase price. What if the
asset rises in nominal value but the
redistribution of wealth
real value, adjusted for
inflation, remains the same? and uncertainty about the
Say you are taxed on capital gains and future.
there is no inflation. If you sell your
home for no capital gain then there’s
no tax. But what if inflation makes
the value of the capital gain
$10,000, but the real value remains
constant. If the tax rate is 30%, then
the seller pays $300 in taxes simply
because the nominal value of the asset
increased.

32. Inflationary Fears
In the late 70’s, inflationary fears
motivated a raise in the FED funds rate
. The FED funds rate is the rate that
banks loan excess reserves to each
other. When this rate raises, there’s
less money for loans and the economy
contracts.
This cartoon implies that the reaction
to any inflationary news roils markets.

33. Real Money
Inflation makes the nominal value of
money worth less. The real value of
money is equal to M/P where M is the
money supply and P is the price level.
Since people make contract decisions
on real income and real buying power
of money, knowing about inflation
helps to make informed decisions.

34. Inflationary Expectations
Everyone forms inflationary
expectations. If inflation has been
running at 2% in the past, consumers
and investors think that the future
inflation will run about the same.
How you view the future determines
how you act today. I believe a self-
fulfilling prophecy forms. The
expectation of higher prices fuels
higher prices.
In the late 1970s wage setters began
to form inflationary expectations
which resulted in the inflation
augmented Phillips Curve.