Mom, dad, what is inflation?

[tmm99]

First off, I am not finance savvy, so hence the title of this post.

What is inflation? What causes inflation?
Does the market follow inflation (do stock prices go up when inflation goes up?) How do you protect yourself from inflation?
Do we lose buying power in a foreign country when inflation goes up?
Do we end up exporting more stuff to foreign countries because our prices look better (lower) in the eyes of foreign currencies?

That's about it for now...

Thank you very much....

 

[Meadbh]

Could you not look this up on Wikipedia or something?

 

[easysurfer]

Inflation is when

a) it used to cost 10 cents for a candy bar 20 years ago but now costs $1

b) it used to cost $1 for a candy bar but now the $1 only buys a candy bar that's half the size

I'm sure there are more examples, but that's a start

 

[Animorph]

First off, I am not finance savvy, so hence the title of this post.

What is inflation? What causes inflation?
Does the market follow inflation (do stock prices go up when inflation goes up?) How do you protect yourself from inflation?
Do we lose buying power in a foreign country when inflation goes up?
Do we end up exporting more stuff to foreign countries because our prices look better (lower) in the eyes of foreign currencies?

That's about it for now...

Thank you very much....

That's a lot of questions. Here are my answers. I'm sure there are plenty of others.

1. Inflation is when you have to pay more now for the same stuff you have previously bought in the past.

2. Inflation is caused by many things, from more expensive raw materials, more expensive labor, more money chasing fewer goods, or just due to a higher price because they can.

3. Inflation has little bearing on stock prices, other than a vague connection to interest rates which are roughly tied to expected inflation. However, stocks have historically kept up with inflation reasonably well.

4. There are many ways to have some protection. The most direct is TIPS, bonds that track inflation. Stocks give very indirect protection. Being a borrower is good, since you pay back with inflated dollars. You can buy now (or lock in a price) and avoid the higher prices later. You can hold some of your portfolio in other currencies that might not have serious inflation.

5. If our dollar buys less of a foreign currency, yes the foreign prices may look higher. Foreign companies can do their own hedges either financially or by manufacturing here to avoid having to raise prices here.

6. Yes, we can sell more overseas if our prices go lower. People like lower prices. Japan would like to sell more by lowering their prices.

 

[Chuckanut]

Inflation is when I bought a Treasury yielding over 10% and still lost purchasing power.

 

[tmm99]

That's a lot of questions. Here are my answers. I'm sure there are plenty of others.

1. Inflation is when you have to pay more now for the same stuff you have previously bought in the past.

2. Inflation is caused by many things, from more expensive raw materials, more expensive labor, more money chasing fewer goods, or just due to a higher price because they can.

3. Inflation has little bearing on stock prices, other than a vague connection to interest rates which are roughly tied to expected inflation. However, stocks have historically kept up with inflation reasonably well.

4. There are many ways to have some protection. The most direct is TIPS, bonds that track inflation. Stocks give very indirect protection. Being a borrower is good, since you pay back with inflated dollars. You can buy now (or lock in a price) and avoid the higher prices later. You can hold some of your portfolio in other currencies that might not have serious inflation.

5. If our dollar buys less of a foreign currency, yes the foreign prices may look higher. Foreign companies can do their own hedges either financially or by manufacturing here to avoid having to raise prices here.

6. Yes, we can sell more overseas if our prices go lower. People like lower prices. Japan would like to sell more by lowering their prices.

Thank you very much for your response.

Do interest rates go up when inflation goes up? (why?)

 

[tmm99]

Inflation is when

a) it used to cost 10 cents for a candy bar 20 years ago but now costs $1

b) it used to cost $1 for a candy bar but now the $1 only buys a candy bar that's half the size

I'm sure there are more examples, but that's a start

Thank you for your response.

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...??)

 

[haha]

That's a lot of questions. Here are my answers. I'm sure there are plenty of others.

1. Inflation is when you have to pay more now for the same stuff you have previously bought in the past.

2. Inflation is caused by many things, from more expensive raw materials, more expensive labor, more money chasing fewer goods, or just due to a higher price because they can.

3. Inflation has little bearing on stock prices, other than a vague connection to interest rates which are roughly tied to expected inflation. However, stocks have historically kept up with inflation reasonably well.

4. There are many ways to have some protection. The most direct is TIPS, bonds that track inflation. Stocks give very indirect protection. Being a borrower is good, since you pay back with inflated dollars. You can buy now (or lock in a price) and avoid the higher prices later. You can hold some of your portfolio in other currencies that might not have serious inflation.

5. If our dollar buys less of a foreign currency, yes the foreign prices may look higher. Foreign companies can do their own hedges either financially or by manufacturing here to avoid having to raise prices here.

6. Yes, we can sell more overseas if our prices go lower. People like lower prices. Japan would like to sell more by lowering their prices.

Excellent answer. The reason 1974 was so horrible for retirees was high inflation, AND a brutal bear market.

Ha

 

[NW-Bound]

Do interest rates go up when inflation goes up? (why?)

Yes.

If I loan you $1 which buys me a candy bar today, and if high inflation causes me to expect to pay $2 for a candy bar at that future time when I get my money back from you, I surely want even more than a $2 payment to compensate me for other risks.

 

[heeyy_joe]

Supply and demand. When too many dollars chase too few goods you wind up with rising prices.

 

[easysurfer]

Thank you for your response.

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...??)

I'd say your guess is right about the latter.

Have you noticed the smaller size of bleach bottles, for example whereas in the past a gallon was standard? Manufacturers want the consumer to think the price didn't go up, but indirectly it does as the what the consumer gets is a lesser amount for the same price.

 

[NW-Bound]

High inflation in the past has also been caused by governments resorting to the most expedient way to solve budget shortfalls: print and distribute more paper money.

Increasing the money supply without producing the accompanying goods and services decreases the value of the paper money.

Too many pieces of paper chasing after too few goods resulted in a paper bill like this.

 

[Rustic23]

Try this:

What Actually Causes Inflation (and who gains from it) - Forbes

 

[tmm99]

Try this:

What Actually Causes Inflation (and who gains from it) - Forbes

Great link! Thank you very much!

 

[tmm99]

High inflation in the past has also been caused by governments resorting to the most expedient way to solve budget shortfalls: print and distribute more paper money.

Increasing the money supply without producing the accompanying goods and services decreases the value of the paper money.

Too many pieces of paper chasing after too few goods resulted in a paper bill like this.

So the inflation we are having now may be from printing more money during the housing crisis....(at least partly the reason...)

 

[NW-Bound]

No, the current inflation is not bad compared to the historical average inflation of a bit more than 3%. However, some people are afraid that it will rear its ugly head when the economy heats up some more. I dunno, but I am watching as many do.

See:

 

[ERD50]

Inflation is that thing that some forum posters underestimate the effects of.

-ERD50

 

[Animorph]

Thank you very much for your response.

Do interest rates go up when inflation goes up? (why?)

Short-term interest rates are pretty much set by the government, but long-term rates are more market driven. If people expect 3% inflation on average over the next 10 years, hardly anyone would give up their money for only a 2% return. Their purchasing power at the end of the 10 year period would be less than they started with. Supply and demand set the interest rate, but inflation expectations will factor in heavily. And note that is expected future inflation, not current inflation. So it's all pretty indirect.

 

[brewer12345]

First off, I am not finance savvy, so hence the title of this post.

What is inflation? What causes inflation?
Does the market follow inflation (do stock prices go up when inflation goes up?) How do you protect yourself from inflation?
Do we lose buying power in a foreign country when inflation goes up?
Do we end up exporting more stuff to foreign countries because our prices look better (lower) in the eyes of foreign currencies?

That's about it for now...

Thank you very much....

Happily, one of my former employers has offered a nice explanation in comic book format: https://archive.org/details/gov.frb.ny.comic.inflation

 

[bjorn2bwild]

When Dad gets inflation, Mom gets a headache.

 

[Koolau]

One more "historic" hedge against inflation is to own precious metals (primarily gold.) Not too many folks on this forum believe this is a good strategy because gold has little intrinsic value (you make jewelry out of it and the occasional electronic connection). It doesn't "earn" anything (even cash in a bank earns interest - well, it used to - and probably will again). Gold is difficult to store safely, etc. etc. etc.

But, for recorded history, gold has been considered money and it can't be "created" in the same way dollars and Euros (and ZIM - see the example above) can be printed. It has wide swings in value vs various "currencies", but for a first approximation, "one ounce of gold has always bought a suit of clothes." Not a recommendation, but I have seen a recommendation to hold 3 to 5% of your NW in gold. I have seen articles (can't vouch for them) which show a smoothing effect when gold in this amount is held with stocks and bonds.

Not attempting to set off a fire storm, but OP asked what might be an inflation strategy. Each of us has to decide if he thinks it's a good inflation stategy or not. More than ever, YMMV.

 

[MichaelB]

Happily, one of my former employers has offered a nice explanation in comic book format: https://archive.org/details/gov.frb.ny.comic.inflation

It's not a bad "Cliff Notes" version of inflation or monetary policy.

 

[brewer12345]

It's not a bad "Cliff Notes" version of inflation or monetary policy.

My 10 year old knows more about macroeconomics than most adults just from reading every Fed comic I was able to find.

 

[Meadbh]

Inflation, Irish style......

 

[MichaelB]

My 10 year old knows more about macroeconomics than most adults just from reading every Fed comic I was able to find.

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