In addition to sounding similar interest and inflation are amazingly inter-related. And in effect interest rates incorporate a "negative feedback loop" into inflation. When people think of the word inflation they generally think of how inflation affects them. They see rising prices of common commodities like gasoline or food and worry about the rising cost of living. But that is simply the effect of inflation and it is technically referred to as "price inflation" but the cause of price inflation itself is actually much more complicated. In the short run, prices can rise due to a shortage in supply, such as a gasoline shortage caused by a refinery having to shut down due to a … [Read more...]
Can Crypto Solve Venezuela’s Hyperinflation Problem?
It is important to note that Hyperinflation doesn't just happen to a country's currency for no reason. In What is Hyperinflation? we found that "Hyperinflation is an extremely rapid period of inflation, usually caused by a rapid increase in the money supply. Usually due to unrestrained printing of fiat currency." Generally, the increase in the money supply is because the government can't pay its debts so it simply prints more money, these debts are usually the result of War, Corruption, or Fiscal Mismanagement. In Venezuela's case, the problem is not that they don't have the assets (they have some of the largest oil reserves in the world), but rather it is a result of their economic … [Read more...]
Debt and Inflationary Pressures: A Lesson in Economic Interactivity
Does debt cause inflation? If so what kind of debt? Personal debt? Government debt? Corporate debt? And what exactly is inflation? In this article we will look at all these issues. Price Inflation occurs when the cost of a representative basket of goods and services is rising. The key factor is the general trend that takes place in an economy, it is possible that individual items such as foreign automobiles, the price of coffee, or corn could rise while other items that require a larger portion of your disposable income are falling (or vice versa). So the Bureau of Labor Statistics uses a "weighted basket of goods" i.e. they calculate what percentage of an average person's salary goes … [Read more...]
Inflation Risk
What is Inflation Risk? Inflation Risk aka. "Purchasing Power Risk" is the risk due to "a decrease in purchasing power of assets or cash flow" due to inflation. A typical example would be a bond that generates a fixed rate of return. For instance, suppose this bond is worth $1000 and generates a 5% yield i.e. $50. Suppose when you purchase the bond that $50 will buy two tanks of gas for your car. Over time inflation will reduce the purchasing power of that $50 so it only buys one tank of gas. If you are counting on using the proceeds of the bond to buy gas there is an "inflation risk" that eventually you will not be covered. The worst case example of inflation risk is if a country … [Read more...]
The Effects of Inflation and Interest Rates on Commodity Prices
In common usage, inflation refers to steadily rising prices of goods and services over time, while "deflation" relates to falling prices. Inflation is both a boon and a bane to the economy and the rate of inflation is affected by a variety of factors including FED monetary policy, interest rates, supply vs. demand, and the Velocity of money. However, strictly speaking, rising prices are "price inflation" which is generally caused by "monetary inflation" i.e. the expansion of the money supply, among other things. See What is Inflation? for more info. Many Keynesian Economists believe that Inflation is a prerequisite for economic growth and prosperity and Keynesians believe Monetary … [Read more...]
Hyperinflation: 5 Currencies that Self-Destructed
Over the years we have discussed Hyperinflation a number of times. We've explained that, "Hyperinflation is an extremely rapid period of inflation, usually caused by a rapid increase in the money supply. Usually due to unrestrained printing of fiat currency." Hyperinflation has been recorded as far back as Egypt 276 AD and is usually caused due to some sort of government mismanagement issue. Typically hyperinflation gets progressively worse until the curve goes hyperbolic and then something happens to end the progression. See What is Hyperinflation? for more information. Recently Commodity.com produced an Infographic of 5 currencies that were hit by hyperinflation so with their … [Read more...]
Annual Inflation Rates Not Uniform Throughout the Country
Every so often I get a reader who writes a comment accusing me (although the numbers actually come from the Bureau of Labor Statistics) of underestimating the actual inflation rate. He reasons that, since his favorite bread cost $3.00 last year and now it costs $3.50... how can inflation possibly be only 2%? Typically my answer has been that individual items can change but actually cancel each other out. Such as in February 2015 when things like “meat, poultry, fish and eggs” increased 7.6% but energy prices fell enough to make the overall CPI slightly less than zero (i.e. deflationary). But this month we actually see evidence of another explanation. Annual Inflation for the year ending … [Read more...]
October Data says Disinflation
The U.S. Bureau of Labor Statistics released the Annual Inflation Rate data for the year through the end of October on November 15th 2017. Annual inflation was 2.04% in October down from 2.23% in September. CPI-U 246.663 Monthly Inflation for October -0.06% Next release December 13th Monthly Inflation is Negative Whenever the monthly inflation rate is negative that is called "disinflation" i.e. prices have gone down since the previous month. If the annual inflation rate is negative that is called "deflation". In October we had disinflation as prices fell slightly (but not below year ago levels). The CPI-U index fell from 246.819 in September to 246.663 in October. … [Read more...]
The Quantity Theory of Money
We have written quite extensively on the cause of inflation in articles like: How does the Money Supply affect our Inflation Rate? in What is Inflation? and Inflation Cause and Effects. One of the keys to understanding inflation is the Money Multiplier. Because of the "Fractional Reserve system banks are only required to keep a small fraction of the money on deposit as "reserves" against potential withdrawals the bank can loan out the majority of the money on deposit to earn interest. This results in a multiplication effect increasing the money supply by vast multiples. This "leverage" can work in either direction. In April 2010, I wrote an article explaining how this can result in … [Read more...]
Inflation Up, NYSE New High
Current Inflation Situation On October 13th the Bureau of Labor Statistics released the Consumer Price Index inflation information for September. The CPI-U index was 246.819 up from 245.519 in August. This resulted in an annual inflation rate for the 12 months through September 2017 of 2.23% up from 1.94% in August, 1.63% in June and 1.73% in July. Monthly inflation was a whopping 0.53% for September primarily due to a 12% increase in gasoline prices due to refinery shutdowns in response to hurricanes. See our Annual Inflation Chart for more info. NYSE Makes New High in Inflation Adjusted Terms! To get a true picture of the state of the market it helps to look at the … [Read more...]
