Inflation makes zero sense, like Iced tea at the north pole.

Discussion in 'Current Events' started by DKSuddeth, Aug 3, 2004.

  1. DKSuddeth
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    DKSuddeth Senior Member

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    I'm no economics major but I'm not stupid either. I've read, studied, analyzed, and tried to understand this supernatural phenomena known as inflation and theres no making heads or tails out of it. Any of you economic gurus out there have any information that can get past a mental block? :scratch:
     
  2. Shazbot
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    Shazbot Member

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    Doesn't inflation occur, for example, when a person fills a balloon with helium? :)

    Really, I'm no economist or anything (by a long shot). I have always understood inflation to be the state in which the average income decreases in comparison to products on the market. ie, what we are seeing with the costs of housing going up while wages are generally staying the same. Is that right? As for how the economy gets to that state...you have given me something to think about! Maybe I ought to fit an economics course into my schedule next semester!

    -Douglas
     
  3. freeandfun1
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    freeandfun1 VIP Member

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    LINK
     
  4. DKSuddeth
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    DKSuddeth Senior Member

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    thanks free. I appreciate the definition of it but what I'm looking for is a working model or theory on the hows and whys.
     
  5. JIHADTHIS
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    JIHADTHIS Active Member

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    Reason for Inflation:

    Halliburton! :dance:
     
  6. freeandfun1
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    freeandfun1 VIP Member

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    Right now inflation is being caused by higher fuel costs. All our goods are transported and therefore, the cost of fuel has a direct impact on the cost of goods. Inflation is sometimes caused by an "overheated" economy in which prices are driven up based on simple supply and demand. The prices go up, but the $'s purchasing power doesn't. Inflation is also caused by the "lack" of money in circulation. So as the $ gets weaker, it CAN cause inflation. However, that is why the FED steps in and lowers interest rates. By lowering interest rates, more "cash" gets out into the market as it is cheaper to borrow and therefore, businesses and individuals will borrow money to buy products and services. This puts more cash into the economy, and therefore, slows the rate of "inflation".

    I am no economist, but this is how I understand it based on my experiences.
     
  7. DKSuddeth
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    DKSuddeth Senior Member

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    Now this is the opposite of what I remember from high school 20 years ago. I remember being taught that inflation was caused by MORE money in circulation, not less. Now I'm just getting more confused. :alco:
     
  8. freeandfun1
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  9. JIHADTHIS
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    You've now confused the hell out of me.....is it more $$ or less $$ ?
     
  10. freeandfun1
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    Maybe this will help!

    Inflation

    Inflation is the general rise in prices across a range of goods and services. It represents a loss of purchasing power for consumers and firms alike. Usually inflation is measured by the retail price index which takes basket of goods, gives them a weighting and measures the change in price over a period of time.

    The causes of inflation
    • Excess demand: demand for goods and services exceeds supply so prices rise
    • Cost push: inflation caused by persistent rise in cost of production
    • Expectations: people expect price rises so demand higher wages and/or go out and buy goods/services while they are cheaper thus causing increases in demand
    • The exchange rate and trade: import cost increases can cause inflation as could a depreciation in the exchange rate casing an increase in the cost of imports.
    The impact on business

    Benefits
    • reduces the real value of loans: ten pounds borrowed today will not be worth ten pounds in real term a year later. The higher the rate of inflation the lower the value of the loan in real terms.

    • makes balance sheet look stronger: inflation will cause assets to increase their value in monetary terms not real terms but this will make the balance sheet look stronger even though there is no real change
    • switch to cheaper products: consumers may swap to cheaper alternatives which is good if that's your line.
    • can increase price: firms can smuggle price increases on the back inflation even if there has been no cost increase for the business. Consumers will expect prices to rise so they will not be as bothered.
    Problems

    • squeezes cash flow: persistent changes in price might cause problems.
    • forecasting problems: how much will the rate of inflation be next year and what will be the cost implications for the firm. It is difficult to predict and therefore plan. Errors in quoting prices might cost profits as might underestimating costs.
    • switch to home/cheaper brands: bad news if your into providing luxuries.
    • increased disputes: workers will demand pay increases in excess of inflation. If the firm does not meet them they might take action.
    The effects of government policy

    • increased rate of interest: higher interest rates cause higher interest repayments. If you are a firm that is reliant on loan capital and/or heavily geared then the interest repayments might become burdensome. Obviously if, as a firm, you are experiencing a period of poor sales you still have to pay the loans despite the reduced revenue. For this reason prudent firms use a mixture of loan and share capital.
     

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