Definition of Disinflation By Tim McMahon To fully understand disinflation we need to first understand inflation. The reasons this is trickier than it first appears is because the word inflation is actually used in two different contexts. The most common usage of the word inflation means rising prices. Commonly "consumer prices" so when you go to the gas station or the grocery store and the things you buy cost more than last month (or when it is really bad even more than last week) this is more precisely defined as "price inflation". The second meaning of the word inflation is actually the original meaning. And that is an increase in the money supply that causes "price … [Read more...]
Will the $800 Billion Bailout Cause Massive Inflation?
Last month I said that the simulated M3 measure of the money supply was indicating that deflation was in the works. See M3 is Back and Predicting Deflation. So how will a massive injection of almost $1 Trillion dollars affect the money supply? If you have read any of the articles on inflation on this site you will realize that the primary cause of price inflation is monetary inflation. In other words, if the government cranks up the printing presses the price of almost everything goes up. For more information see What is Inflation? and Inflation Cause and Effects. So you would think that it is only obvious that a massive injection of money like the recent $800 Billion bailout … [Read more...]
Why would Gold fall during an Investment Crisis?
Editor's Note-- In the article Is Gold really a good Inflation Hedge? I said, Gold is actually a "crisis hedge." So it should be performing extremely well with all the uncertainty in the markets right now. In this article Andrew Gordon explains how gold is currently in limited supply and demand is booming due to the crisis and what is currently affecting the price. -- Tim McMahon, editor Has Gold Lost its Investment Luster? By Andrew Gordon Gold dropped from $915 to $859 on Friday [October 10, 2008]. That’s not supposed to happen while the market is crashing. What’s going on? … [Read more...]
Inflation and Recession Chart
How does Inflation and recession correlate? Current Commentary Does high inflation correspond with a recession? Or does high inflation precede a recession? This chart shows the historical average Annual Inflation rate (red line) compared to the time periods where the country was in recession (blue shaded areas). Since 1914 there have been eight recessions. Three lasted for a single year, (in 1953, 1957 and again in 1990). The longest recession was actually the "Great Depression" which lasted ten years from 1929 to 1939. … [Read more...]
Inflation vs Consumer Price Index – Do you know the difference?
Many people are confused by the difference between Inflation and the Consumer Price Index. The Consumer Price Index is as its name implies an index, or “a number used to measure change”. The Consumer Price Index (CPI-U) The government chose an arbitrary date to be the base year and set that equal to 100. Currently that date is 1984. (Or more accurately the average of the years 1982-1984) previously the base year was 1967 (they change the base year every once in a while so you don't notice that there has been over 2000% inflation since the start). See Cumulative Inflation Since 1913. Every month the Bureau of Labor Statistics (BLS) surveys prices around the country for a basket of … [Read more...]
What Causes Inflation?
Inflation Cause and Effect I often receive letters from students, that demonstrate a fuzzy understanding of inflation and its causes. Unfortunately, I often get the same type letters from teachers and business people too! It seems that people often confuse the cause of inflation with the effect of inflation and unfortunately the dictionary isn't much help. As you can see in my article What is the Real Definition of Inflation? the modern definition of inflation is "A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money..." In other words according to this definition inflation is things getting more expensive. But that is … [Read more...]
What is Deflation?
Define Deflation: In common usage deflation is generally considered to be "falling prices". But there is much more to it than that. Often people confuse deflation with disinflation or with Depression (as in "the Great Depression"). These three terms are related but not synonymous. According to Investorwords.com the definition of Deflation is "a decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, … [Read more...]
Euro Area Inflation Estimated at 4.0%
At 4% Euro Area inflation is very similar to the U.S. Inflation rate. On June 30, 2008 the Eurozone released what they call a "Flash" estimate of their inflation rate for the month of June. It is provisional and could be modified before the final release. But they claim it is 95% accurate. Calculating Inflation in the EuroZone is more complex than for a single country. Their individual country inflation calculations are called HICPs (Harmonised Indices of Consumer Prices). Current Euro Area Inflation Chart (1 Yr) %CODE3% Chart courtesy of www.rivaluta.it While the combined inflation rate is called "The Monetary Union Index of Consumer Prices" (MUICP) which … [Read more...]
Cumulative Inflation by Decade
How Much Inflation have we had since 1913? Just like compound interest compound inflation grows faster and faster. The average annual inflation since 1913 is "only" 3.42%. But as you can see from the chart to the right compounding something for almost 100 years at 3.42% will result in over 2000% inflation. A 2071% increase is a hard concept to grasp so to put it another way, something that cost $1.00 in 1913 would cost $21.71 today ($1 + $20.71 inflation). Or conversely a dollar today is only worth 4.8¢ in 1913 dollars. In other words the government over the years has stolen 95.2¢ out of every dollar. … [Read more...]
How can we have Inflation and Deflation at the same time?
In common usage, deflation is generally considered to be "falling prices" while Inflation is "rising prices". Actually this is "price inflation" as opposed to "monetary inflation". For more information see What is Deflation? and What is Inflation? and Inflation Cause and Effects. So if inflation is rising prices and deflation is falling prices, how can prices rise and fall at the same time? Somehow that seems counter intuitive. Obviously, when the Bureau of Labor Statistics comes up with the Consumer Price Index it is either higher or lower than the month before so we have inflation or deflation. But that is the number for the whole economy, it includes over 10,000 items and … [Read more...]
