Introduction to Finance

FIGURE 8.3
Changes in Consumer Price Indexes, 1980–2015
Sources: 
Economic Report of the President
, 2016 and Department of Labor, Bureau of Labor Statistics.

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C H A PT E R 8 Interest Rates
have generally been under 2 percent (except for 2009 and 2011) and were less than 1 percent 
in 2014 and 2015. Changes in the CPI measure that exclude food and energy have averaged 
2 percent or less in recent years. 
Types of Inflation
Infl ation may be associated with a change in costs or a change in the money supply, or because 
of speculation or so-called administrative pressures.
Price Changes Initiated by a Change in Costs 
The price level can sometimes 
increase without the original impulse coming from either the money supply or its velocity. If 
costs rise faster than productivity increases, as when wages go up, businesses with some control 
over prices will try to raise them to cover the higher costs. Such increases are likely to be eff ec-
tive when the demand for goods is strong compared to the supply. The need for more funds to 
meet production and distribution at higher prices usually causes the money supply and velocity 
to increase. This type of infl ation is called 
cost-push infl ation
, as this rise in prices comes from 
the cost side, not from increases in the money supply. Prices may not go up, however, if the 
monetary authorities restrict credit expansion. In that case, only the most effi
cient businesses 
will have enough demand to operate profi tably. As a result, some resources will be unemployed.
Cost-push infl ation can occur only in industries in which labor negotiations are carried 
out industry-wide, and in which management has the ability to increase prices. Cost-push 
infl ation is diff erent from infl ation caused by an increase in the money supply.