[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

purchase foreign goods, so their prices are factored into the CPI, but they are not
included in the GDP deflator since GDP measures only production within the
country’s borders. Because of these differences we will obtain slightly different
measures of inflation, depending on which price index we use.
The American Experience with
Inflation
As we have learned, the inflation rate is the percentage increase in the price level
from one year to the next. Figure 23.3 shows the inflation rate for the United States
during the past century. Three interesting features stand out.
First, prices were relatively stable for much of the century, with the inflation
rate under 5 percent except in three periods: around World War I, around World
War II, and during the period 1973–1981. Indeed, from the start of the twentieth
century until the early 1960s, the average inflation rate was only about 1 percent
per year.
Second, prices can actually fall as well as rise. During the recession that followed
World War I, prices fell by more than 15 percent, and during the Great
Depression of the 1930s they fell by more than 30 percent. In fact, at the end of the
20
15
RATE OF INFLATION IN CPI (%)
10
5
0
–5
–10
–15
1920 1930 1940 1950 1960 1970 1980 1990 2000
Figure 23.3
THE INFLATION RATE
The inflation rate is the percentage increase in the price level in a given year. Notice that
inflation was low through most of the early part of the last century, although it was high
during both world wars. Inflation rose sharply in the 1970s, and then fell during the
1980s. It has remained relatively low since the early 1990s.
SOURCE: Bureau of Labor Statistics.
THE AMERICAN EXPERIENCE WITH INFLATION ∂ 519