Inflation: The Same Dollar, Less Bread

Lucy is twelve years old. She lives in Riverton with her parents and her brothers, Jack and Max. Every Friday, Lucy gets $10 of pocket money from Dad. Every Friday after school, she walks with her friends to the ice cream shop on Main Street and buys cones.

Last summer, a cone of vanilla ice cream cost $2. With her $10, Lucy could buy five cones and share them with her friends. She felt very rich.

This summer, Lucy walks into the same shop. She looks at the board, and she stops. The price of a cone is $2.50.

Lucy asks the girl behind the counter, "Why is it more expensive this year?"

The girl says, "The milk, the sugar and the electricity cost more now, and we pay our workers more. So we had to raise our price."

Lucy walks home with a puzzled face. At the kitchen table, she tells Dad, "A cone costs 50 cents more than last year, but my pocket money is still $10."

Dad says, "Let's check the numbers."

He writes on a piece of paper.

What Is Inflation?

Dad explains that when most prices in an economy rise over time, it is called inflation. The rise is measured as a percentage. Lucy's ice cream cone rose from $2.00 to $2.50, which is a 25 percent increase. Inflation in the whole economy is usually much smaller, but the idea is the same.

Inflation makes money lose value. The dollar in Lucy's hand is the same piece of paper, but it buys less. Economists say that the purchasing power of her pocket money has fallen. This is why wages and pocket money often have to rise, too, so that people can afford the same things.

The causes of inflation can be many. Costs for businesses can go up. Or people may want to buy more than the shops can supply. A little inflation can be normal, but fast inflation makes it hard to plan.

Back to the Kitchen Table

Lucy looks at the table. She says, "So the only thing that changed is the price. My allowance stayed the same, so I lost one cone."

Dad smiles. He says, "That is right. Would you like to ask for a raise?"

Lucy says, "Yes, a small one. I think $12.50 would keep me at five cones."

Dad laughs and says, "That is a very good argument. Let's talk about it over dinner."