The United States economy has experienced slow but steady growth since the 2007-2009 recession. Historically, one result of an improving economy should be an increase in the overall level of prices – inflation. This has not been the case, however, and inflation has stayed low. Inflation has remained low in part because most people don’t worry about it rising, and they aren’t rushing to buy products before they go up in price. Listen to this story from Planet Money and hear what low inflation sounds like, and how your behavior can directly affect whether prices rise or fall.
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PrintRENEE MONTAGNE: And the new inflation numbers came out this morning. They show a slight uptick in inflation. But as we’ve seen for some time now, it remains relatively low. This is despite the fact that over the last few years the US Federal Reserve has created trillions of dollars out of thin air. Trillions of dollars. Jacob Goldstein from our Planet Money team wanted to know why hasn’t all that new money led to more inflation.
JACOB GOLDSTEIN: The classic Econ 101 explanation for inflation boils down to this: Too much money chasing too few things. For example, say the Fed creates all this money out of thin air and people go out and buy new cars. You probably don’t need an economist to tell you what happens next. But I got one anyway.
BILL SILBER: More people buying cars leads companies like General Motors and Toyota to raising prices.
GOLDSTEIN: That’s Bill Silber. He wrote a book about former Fed Chairman Paul Volcker. And he says, when companies start selling lots of stuff, and raising their prices, it’s easier for their workers to get raises. And when the workers get raises, they go out and buy more stuff. So companies raise their prices some more. But this has not happened over the past few years, despite the fact that there’s all this new money out there.
Why not? Part of the reason, Silber says, is that all that newly created money is not in the pockets of ordinary people who could go out and spend it.
SILBER: It’s just sitting there in the banks. As long as it sits there, it’s not dangerous.
GOLDSTEIN: The banks aren’t lending much. Today, nearly six years after the financial crisis the economy still hasn’t fully recovered. Millions of people are still unemployed. And Joe Gagnon, an economist at the Peterson Institute, points out even people who do have jobs can’t just walk into the boss’s office and demand a raise.
JOE GAGNON: For most people in most industries, the boss would say: Well, I’m sorry I can’t really afford to give you one right now, our sales aren’t that great. And to be honest, we’ve got a lot of qualified applicants, you know, who want to take your job.
GOLDSTEIN: So wages are stagnant. Goods aren’t flying off the shelves. Companies can’t jack up prices. And inflation is just creeping along at a low level. That’s most of the story, anyway. But there is this one other weird, interesting piece: Inflation today is low partly because people aren’t that worried about inflation.
Quick trip to Times Square in New York.
BEVERLY HUSTICE: I don’t think we’re thinking about it. I’m sure it’s happening – we’re just not seeing it. It happens so incrementally that we don’t see it.
JOHN ADAMS: I don’t think inflation at the moment is a concern.
ANN ZIEGLER: I don’t know how much it’s happening now, or if that’s having a huge impact on our prices.
GOLDSTEIN: Beverly Hustice, John Adams, and Ann Ziegler are three random people I found on the street. And the way they, and all the other random other people on the street think about inflation, actually has an effect on what happens with inflation. Sure, people always complain that things are getting too expensive. But when people are really worried about inflation, they start acting differently.
Back in the late ’70s and early ’80s, when inflation in this country was around 10 percent, people expected prices to keep rising quickly. So, Bill Silber says, they rushed out to buy stuff before prices went up even more.
SILBER: I’m going to buy a car for $5,000. Back then, that’s what it cost – believe it or not. I’m going to buy a car for $5,000 because if inflation is 10 percent a year, next year it’s going to cost $5500. So I’m going to buy today.
GOLDSTEIN: Cars are flying out of the showroom. Car companies raise prices – boom, high inflation. Today, on the other hand, people are not rushing out to buy stuff.
Here’s Cynthia Buda, one last person I talked to in Times Square
CYNTHIA BUDA: If I can afford it and pay cash for it, I’m going to do it. If I can’t then I’m a little more hesitant than I would have been 20 years ago. I would have just slapped it on a credit card.
GOLDSTEIN: That is what low inflation sounds like. Jacob Goldstein, NPR News.
© 2014 National Public Radio, Inc. Used with the permission of NPR. All rights reserved. Vocabulary
- stagnant – being stuck in the same situation, not moving or growing
- incrementally – changing by a small amount
- economist – a scientist who studies the wealth and resources of a country
- inflation – a rise in the average price level of all the goods and services produced in an economy
- Times Square – a major tourist destination in New York City known for its shopping and theaters
Listening Comprehension Questions
- Explain why inflation is caused by “too much money chasing too few things”.
- If people are buying more cars, why would a car company raise its prices?
- Why do you think banks are “sitting on money” and not lending it out? What effect does this have on the economy?
- How does a consumer’s behavior change when faced with inflation? How would they act differently if they were not concerned about inflation?
Discussion Themes
- This audio story was recorded in 2014. In your opinion, do you think people today are worried about inflation? Why or why not?
- Can you think of a situation in your own life where events that might happen in the future changed your actions?
Teacher’s Guide
Activate student knowledge: Open the lesson by asking students if they have ever heard a grandparent or older adult complain about how cheap things were “back in the good old days”. For example, they might have heard a grandparent talk about how a candy bar only cost a dime when they were little. The candy bar didn’t change so why does it cost so much more today? The candy bar is the same, it is the dime that has changed and buys less than it did years ago. The reason that the dime has less buying power is because of inflation. Show students an inflation calculator and demonstrate that you would need 60 cents today to match what a dime could buy in 1970. Use the price of goods/services from other decades to see the difference is buying power.
In the last decade, we have not experienced a high level of inflation. Even though our economy has been growing, the overall level of prices have stayed the same. For the most part, this is a good thing. We don’t want inflation – we want the value of our money and its buying power to stay the same.
Use the inflation calculator online: http://data.bls.gov/cgi-bin/cpicalc.pl to complete the How Much is it Worth? chart and have students determine the prices of items in 1990 and today. Then ask students: What goods and services are cheaper today than they were in 1990? Why do you think that is? What goods and services are more expensive today than they were in 1990? Why do you think that is?
Introduce the story: As a class, discuss what causes prices to rise. Ask students why we haven’t had a high level of inflation in the last decade. Tell them that in this audio story, they will hear an economist explain why prices rise and why a lack of inflation can also be troubling.
Active listening supports: Choose one of the following listening organizers to support student understanding as they listen to the story.
- The Know and Learned Chart will help students think about what they already know and what they learned about inflation.
- The How Much is it Worth? chart will help students determine how much of today’s money they would need to buy the good or service at yesterday’s prices, using inflation calculators.
- The Language Identification organizer allows students to follow along and track important phrases while listening to the story
Reflect on the story: Take time for student reflection on the audio story and discussion questions to check for understanding. Responses to graphic organizers or other assignments can help guide this reflection.