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

[DKSuddeth]

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:

 

[Shazbot]

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:

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

 

[freeandfun1]

The average rate of increase in prices. When economists speak of inflation as an economic problem, they generally mean a persistent increase in the general price level over a period of time, resulting in a decline in a currency's purchasing power. Inflation is usually measured as a percentage increase in the consumer price index.

LINK

 

[DKSuddeth]

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.

 

[JIHADTHIS]

Reason for Inflation:

Halliburton!

 

[freeandfun1]

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.

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.

 

[DKSuddeth]

Inflation is also caused by the "lack" of money in circulation.

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:

 

[freeandfun1]

Inflation is also caused by the "lack" of money in circulation.QUOTE]

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:

I believe you are correct.

 

[JIHADTHIS]

You've now confused the hell out of me.....is it more $$ or less $$ ?

 

[freeandfun1]

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.

 

[freeandfun1]

You've now confused the hell out of me.....is it more $$ or less $$ ?

Too much money. I had it reversed. The FED lowers rates when they feel we need more money on the market (which, can lead to inflation) and they RAISE rates when they want to reign in inflation.

I was wrong. Damn it!

 

[DKSuddeth]

Now thats a bit closer to what I was thinking it was. I don't have time right now (gotta go do yard work) but this is an issue I would like to discuss more, if people are up to it. :cof:

 

[Annie]

Too much money. I had it reversed. The FED lowers rates when they feel we need more money on the market (which, can lead to inflation) and they RAISE rates when they want to reign in inflation.

I was wrong. Damn it!

LOL It happens to the best of us! I thought that was right, opposit of recession when they ease rates. Too much money in circulation. Not that any of it matters to me, I don't have any!

 

[freeandfun1]

Now thats a bit closer to what I was thinking it was. I don't have time right now (gotta go do yard work) but this is an issue I would like to discuss more, if people are up to it. :cof:

When you get back, I am all up for discussing it. It is quite germane at the moment.

 

[5stringJeff]

I'm up for a good discussion too. Gotta run right now though.

 

[Hobbit]

Well, even though there's been a good explanation already, I'll take a crack at it.

Inflation is, in its standard, accepted definition, a devaluation (decrease in value) of currency. Basically, when there's inflation, a dollar won't buy as much as it used to, but since labor is another thing that must be bought, the purchasing power of the consumer isn't hit too hard. When prices of many or necessary goods and services goes up (and that includes the price of labor), we have inflation. If prices rise, people have a harder time getting by with what they have, so they ask for raises. The corporations can afford it with the rising prices, so they get it. A week's wages buys the same things, but now it's $150 instead of $125.

The other cause is in the same loop, but in a different place. Workers get raises and have a lot more disposable income. Merchants figure out they can charge more, so they do. Same effect.

It's a lot easier to understand if you truly understand supply and demand. They are curves comparing price to units made/sold. If the price goes up, more units are made, since it is more profitable, but fewer are sold, and vice versa. The point at which the two cross is the optimum price. It's where every unit made is sold and all consumers willing to purchase it have done so. If the price is too high, there is a surplus. If the price is too low, there is a shortage. When inflation happens, the price of one thing is raised above the optimum, and the curves are adjusted to compensate.