Diantha Ellis is an Associate Professor of Business Administration in the Stafford School of Business, at Abraham Baldwin Agricultural College (ABAC)
It’s the worst-kept secret of the summer—a trip to the grocery store and gas station costs a lot more these days. On top of that, the price of keeping a roof over our heads is also increasing. In fact, it seems that prices are rising on everything we buy. And the new Consumer Price Index (CPI) numbers just released by the Bureau of Labor Statistics for June 2022 back up those feelings, as the report notes the largest increase in CPI in forty years.
But what do we mean when we talk about inflation? And how should an Economics instructor go about teaching inflation in a way that best breaks down this mystery for the freshman college student?
There’s more complexity to inflation than most realize. It’s not really a one-size-fits-all topic, and this is the first piece of information that is important to make sure that students understand. I like to remind my students that they are budding economists (whether they are planning to forge ahead in the study of economics or not) because once they complete their Principles of Economics courses, they will likely know more about economics than the average person does.
Introduce Students to the Big Picture
While inflation is capturing a great deal of the news cycle lately, economists actually use multiple measurements to evaluate the health status of the economy, and all of them are interconnected. Inflation is one piece of a very big economic puzzle that also includes the Gross Domestic Product (GDP), Gross National Product (GNP), and unemployment, to name a few.
As far as inflation measurements go, the CPI gets the most general attention. But, there’s also the Personal Consumption Expenditures Price Index (PCE), which is released by the Bureau of Economic Analysis (BEA) and tends to get a lot more attention from the Fed. Evaluating both the CPI and the PCE is key to analyzing the direction in which Fed rates and stock prices will move, all of which ties into the prices of our essential basket of goods. So, it’s an interconnected puzzle that needs all the pieces to properly analyze. When students focus only on a single piece of the puzzle, they will miss key elements of the entire picture and thus not have the full story.
Is All Inflation Equal?
Another important point to note for students is that all inflation is not created equal. There are multiple types of inflation, some of which get much too complex for a principles class. In general, most economists tend to note two broad categories of inflation: cost-push and demand-pull or supply side and demand side, respectively. Most economists tend to agree that the current environment is showing evidence of both.
Make the Information Relatable to Your Students
While the textbook is a great starting point for teaching inflation, it shouldn’t be our only resource, especially since information about this topic is constantly changing.
Multiple sources, including the BLS, BEA, Federal Reserve, FRED, and reputable news sources are vital to bringing this information to life for students. One of my favorite tools on the BLS site that I like to use to get the conversation started is the CPI Inflation Calculator. Using this tool, students can go all the way back to 1913 and compare the value of certain goods (e.g., a house, a car, a loaf of bread, etc.) in today’s dollars to another point in time. It’s always a good ice breaker to get them thinking about just how much the value of the dollar has changed over time.
You can task them with creating a grocery list of goods and ask them to make note of the prices they pay for the items at the grocery store and then compare those prices to important years in their life (e.g., the year they were born, the year their parents married or were born, the year their grandparents married or were born, etc.). It is a fun way to engage them in the topic. This also helps them to understand and put into perspective those stories that family members talk about “back when I was your age, I used to pay….”
Come to think of it, based on my recent trips to the grocery store, it might be time to dust off some of those old recipes my grandmother used to talk about like: Depression Cake and Hoover Stew. Now wouldn’t that make a great Economics lesson?
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