I recently answered this question on Quora. And I thought I would share an expanded answer with you as well. Whenever a question starts with an assumption you need to examine whether that assumption is in actuality true. If the assumption is vague enough it can be fairly difficult to determine and we might be tempted to go with the basic assumption. In this case, the assumption is that "everything" "big" is increasing in price faster than average. We have no clue what he means by "everything" (I'm sure he isn't being literal) and what does he mean by "big"? Large as in houses, and cars, or expensive like Yachts and Lamborghinis, or things that are a large portion of the average person's … [Read more...]
How Does Inflation Affect Businesses?
The fallout from inflation doesn’t always receive a balanced, informed portrayal from the media. This is somewhat understandable since, unless inflation makes a drastic move, its slow steady erosion of purchasing power is not considered newsworthy. However, as with most economic forces, not everyone “loses” when inflation boosts the everyday cost of living. Inflation can actually either benefit or destroy American businesses, and individual preparation for its eventual, inevitable impact often decides how detrimental or beneficial it is. Foreign Exchange International purchases become more costly as inflation diminishes the dollar’s purchasing power relative to other currencies. This … [Read more...]
July Inflation Report
The U.S. Bureau of Labor Statistics (BLS) released their July Inflation report on August 13th 2019, for the 12 months through July 2019. Annual Inflation is Up Annual inflation in July was 1.81% up from June's 1.65% almost identical to May's 1.79% and March's 1.86% but below April's 2.00%. CPI Index in July was 256.571, June was 256.143, May was 256.092. April's was 255.548 and March was 254.202. Monthly Inflation for July was 0.17%, June was virtually zero at 0.02%, May was 0.21%, April was 0.53%, March was 0.56%. June 2018 was 0.16%. Quantitative Tightening (QT) continued but the FED says it is stopping. Check it out here. What is Quantitative Tightening? Next release … [Read more...]
How Does Inflation Affect Foreign Exchange Rates
Inflation affects every consumer, business person and investor in some way or other. Inflation is one of the key factors that affect consumer prices, financial markets including Stocks, Bonds and Forex. As such, it is important for consumers, investors and traders to get a deeper understanding of what is inflation and what causes it. What is Inflation? Understanding inflation is often complicated by the fact that the cause and the effect are often muddled together in people's minds due to the lazy way we often refer to inflation. The effect of inflation is what people see when they go shopping and see increases in the general price of goods and services. When the individual prices of just … [Read more...]
How Inflation and Interest Rates Relate
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...]
