Mom, dad, what is inflation?

[brewer12345]

I bet he knows more than a few economists as well, given the crazy stuff some of them have said.

He is a she. She asked to learn about investing this summer, so we have started this week with lessons on financial accounting and how financial statements work.

 

[MichaelB]

He is a she. She asked to learn about investing this summer, so we have started this week with lessons on financial accounting and how financial statements work.

I knew from prior posts, beg pardon.
Good luck with the teaching. A solid financial foundation goes a long way and gives an excellent competitive edge in the jobs market...but you already know that. I tried but wasn't around enough when mine were that age, later it was just too late.

 

[brewer12345]

I knew from prior posts, beg pardon.
Good luck with the teaching. A solid financial foundation goes a long way and gives an excellent competitive edge in the jobs market...but you already know that. I tried but wasn't around enough when mine were that age, later it was just too late.

This is a key motivator for me to have bail on the cube. They are still young enough that I can get through to them. Better yet, as my eldest picks this up quickly, her younger sister eagerly awaits her turn. Hopefully neither will need to bother with an MBA as they will have already gotten the homeschool version of the most valuable stuff.

 

[ChiliPepr]

Can people sell the 1/2 size candy for $1 even if there is no inflation? And if everyone does the same thing (despite no inflation), should this still be called inflation (in the sense that everyone sells things for more although the cost to make them didn't change)? or this hypothesis doesn't happen in real llife? (I see prices going up or sizes of boxes getting smaller, but , but I cannot tell if people are getting more greedy or if cost to make them is getting higher (and I imagine the latter is true inflation...??)

Basically, no. If someone can sell 1/2 size candy for $1, (when you used to get a full size for $1), by definition, there is inflation. If there was not inflation, nobody would buy it. If you can sell something for more money in the future, no matter the cause, there is inflation.

If something goes up in price due to greed or cost, the result is the same, inflation.

It has also been mentioned that money supply can be a cause... think about that, if everyone in the US just got a 100% raise, do you think prices would stay the same or go up?

 

[Independent]

Does the market follow inflation (do stock prices go up when inflation goes up?) How do you protect yourself from inflation?
.

Stock prices don't track inflation closely, but top line revenue should.

If the average cost of consumer goods goes up (i.e. the price of a typical market basket of goods goes up), then the firms that sell those goods are getting more revenue per widget.

Whether or not that makes it to the bottom line depends on all the other items in the gain and loss calculation.

 

[Rustic23]

Somewhere in one of my business courses I remember discussing return on investment (ROE). The Prof said that people want a return on their investment commensurate with the risk involved. The example was if an investor/owner can get say 4% on his money no risk, he will not accept say a lease on property at the same rate. i.e. more risk.

Where does this come into play. Well say you own a fast food restaurant. The return on your investment is say 10%, and you are happy. Now say your employees want/demand a raise. If you give them that raise, your ROE will be 8%. You can get 8% on other investments with less risk and less stress. Chances are your will either figure out a way to get back to your 10% ROE, or you will cash out of the business, if possible. The most probable course of action is to raise your prices to cover your increase cost. The increase is seen as 'inflation'. It should also be noted that your increase in raise ripples through out the economy, and in the long run the employees are right back where they were in a couple of years. (There elected leaders that promised them a raise, however are happy)