Showing posts with label Inflation explained. Show all posts
Showing posts with label Inflation explained. Show all posts

Sunday 23 July 2023

Understanding Real Inflation Threats

When may inflation be too high?

These are still very useful averages as benchmarks for judging when inflation may be too high:

  • Any emerging nation with a rate of inflation much above 4%, or 
  • any developed nation with a rate much above 2%.

Any country with high inflation has cause for concern.


High consumer price inflation is a growth-killing cancer.  

This still holds true.  

  • In the short-term, rapidly rising prices compel central banks to raise interest rates, making it more expensive for businesses and consumers to borrow.  High inflation also tends to be volatile, and its swings make it impossible for businesses to plan and invest for the future.   
  • Over the longer term, inflation erodes the value of money sitting in the bank or in bonds, thus discouraging saving and shrinking the pool of money available to invest in future growth.


Actions of central banks post crisis of 2008

In the slow growth-environment that took hold after the crisis of 2008, central banks often worry that inflation may be too low, not too high.

In developed countries, instead of raising rates to make sure inflation doesn't increase to far above a target of 2%, they now cut interest rates when inflation is falling too far below 2%.  

Their big fear is that low inflation will lead to outright deflation - the dreaded but overblow "Japan scenario".


"Bad deflation" and "Good deflation"

History, in fact, shows that neither low inflation nor deflation are necessarily bad for economic growth.   

Japan suffered a rare bout of "bad deflation" after the collapse of its stock and housing bubbles in 1990Consumer demand dried up, prices started to fall and shoppers began delaying purchases in the expectation that prices would fall further.  The downward spiral depressed growth for 2 decades.  

However, deflation can also follow a new tech or financial innovation that lowers production costs and boosts economic growth.

If inflation is too high, it is almost always a threat to growth but the same cannot be said of low inflation.  Even if low inflation threatens to devolve into deflation, it could be good for growth if falling prices are driven by new innovation and expanding supply rather than by depressed demand.


Need to control inflation in both consumer markets and financial market

Perhaps, the deepest flaw in traditional thinking, however, is that it still focuses on the kind of inflation that has largely disappeared.   

  • After the central banks won the war on high consumer price inflation, they cut interest rates to levels that have fueled a massive run-up in prices for financial assets, including stocks, bonds, and houses.  
  • And in recent decades, as we have seen, stock market and housing bubbles have been increasingly common precursors to financial crisis and recessions. 


Traditional thinking fails to recognize the new inflation threat in the financial market

Economists have been very slow to recognize this new inflation threat, and central banks have been very slow to think outside their official mandates, which focus on stabilising the economy by controlling inflation in consumer prices only.  

But successful nations will control both kinds of inflation, in consumer markets and in financial market.

No subject in economics is more paralyzed by traditional thinking than inflation, a term that generally refers only to the pace of increase in consumer prices, a once ubiquitous threat that has largely vanished in recent decades.  

Central bankers and economists still tend to focus on consumer price inflation, even though it has largely disappeared and to ignore prices for assets like stocks, bonds and real estate, even though there is an increasingly clear link between real estate and stock market busts and economic downturns.

Wednesday 15 August 2012

The greatest threat to your future financial security

The greatest threat to your future financial security is the loss, over time, in the purchasing power of power currencies.  A dollar today buys less than 5% of what a dollar bought 100 years ago.

Study the fascinating history and theory of money and use this knowledge as a basis in formulating and guiding your investment philosophy.

Saturday 19 November 2011

The corrosive effect of inflation explained.

"Inflation has turned £100 into less than £20"
One stockbroker explains the corrosive effect of inflation.


Increasing inflation combined with low interest rates means many offshore savers will be getting poor rates of return on savings accounts
The dangers of inflation Photo: Larry Lilac / Alamy
How would you feel if you bought a security for £100 back in 1971, and it was worth less than £20 today? Unfortunately, if you are over 60 years old, as I am, you will probably have done exactly this, as this is how much the purchasing power of sterling has fallen over this period.
To put it the other way around, had I gone into a supermarket 40 years ago and bought a trolley of goods for £20 and then returned to the supermarket today to buy the same trolley of goods, it would cost me £240.
Inflation is the most insidious investment risk, but its destructive power is frequently ignored by investors and financial regulators alike. There is a tendency to believe that if you save a pound, then, providing you get your pound back, plus a return while you were not using the money, all is well.
Wrong! Money is simply a form of exchange and its true value is determined by what it can purchase, not by its face value.
For the value of your money on deposit to hold its purchasing power, you would have to generate an interest income, after tax, equal to the rate of inflation. Even to a standard-rate taxpayer, that demands a return of 6.25pc with inflation at 5pc. What is more, you can't spend it – you have to save it.
Even over the past five years, from October 2006, the purchasing power of £1 has fallen to 84p.
Where is inflation going from here? The truth is that while short-term inflation can be predicted with some accuracy, and in the short term it is likely to decline as certain known increases of a year ago fall out, no one knows where it is going in the longer term.
There hangs the rub. Many commentators, and I would count myself among them, believe that the level of quantitative easing being undertaken by the Bank of England will result, in the longer term, in further serious – if not hyper – inflation.
In such an environment, monetary assets will decline in purchasing power, while, on the basis of historical precedent, physical assets such as property and shares will maintain their value in real terms.
The conventional wisdom, as one gets older, is to reduce exposure to equities and increase the money on deposit or in fixed income. The risk in this is that we have no idea how long we will live for, but with increasing life expectancy one is potentially exposing oneself to inflation risk for an indeterminate period of time.
Historically, this made sense – as shares generated less than fixed-income securities, so it was logical to go for the higher income and greater certainty. However, today, with the London equity market yielding 4pc after tax, equivalent to 5pc before tax, it is difficult to get an improvement from long-dated fixed-income securities and impossible from gilts or money on deposit.
I would therefore advise a higher equity content for portfolios today and, while I recognise that it is difficult to do so, I would also urge an investor to try to ignore the volatility in capital values, both good and bad, and focus on the dividends.
History tells us that over the years dividends have more or less maintained their purchasing power relative to inflation throughout most of the chaos that the world has thrown at us, and they have done so by steady growth and none of the volatility shown by the equity capital values.

Wednesday 17 November 2010

Inflation does matter in China and the world

Inflation does matter in China and the world
By Huang Shuo (chinadaily.com.cn)
Updated: 2010-11-15 16:58

The growth rate of China's consumer price index (CPI) was 4.4 percent year-on-year in October, a 25-month high. The rate is up 0.8 percentage points from September. This is an alarming statistic for a country that for the past three decades has had steady economic growth. Inflation risks do matter for China.

In particular, the new factor of a rise in prices, main promoter for CPI growth, took up 3 percentage points of the 4.4 percent surge. Prices of agricultural products and food have been playing major roles in contributing to the CPI hike. Food prices surged by 10.1 percent compared with the same period of last year as a result of the price hike in international agricultural products, and the recent flood in South China’s Hainan province affected vegetable prices and oil prices, adding to the product costs, said Sheng Laiyun, spokesman for the National Bureau of Statistics (NBS).

In addition, daily essentials such as eggs and vegetables are leading the price increases in China's consumer market, followed by meat, oil and white sugar.

As the industry generally expected that about 4 percent would be the proper answer for CPI, the final data released by the NBS on Nov 11, 2010, was 0.4 percentage points higher than estimated, which astonished the public and drew lots of attention from domestic and foreign experts.

Consumer prices associated with social stability are the top concern of the public in China. The increase of CPI indicates that the surge in commodities prices is ongoing in the consumption market, closely linked with the daily lives of ordinary people. China’s income per capita still lags behind the United States, the European Union, and even some other emerging economies. How to increase income and stabilize or lower the prices in the market, especially for daily essentials, should be attached great importance by the government.

Livelihood is like the basis for constructing a building, which lays the firm foundation for a harmonious society. Whether people can lead a good life decides the quality of governance by central and local authorities. High consumer prices pose an unstable economic factor to improving the living standard of people.

More regulations are expected for the soaring Chinese CPI. As to that situation, the People’s Bank of China, the central bank of China, has noticed and adopted a measure increasing the required reserve ratio by 50 basis points and coming into effect on Nov 16, 2010, in order to ease the pressure from the second round of quantitative easing policy (QE2) by the Federal Reserve of the US and increasing liquidity caused commodity prices to rise in China. But is it enough to merely depend on national economic regulatory authorities?

Every economy released loose monetary policies to conquer the challenges brought by the international financial crisis in 2008 and get out of the recession. But side effects are inevitable. Rising inflation is one of the consequences. As a result, countries with expansion policies on issuing more currencies should work together and reach agreements to confront the emerging side effect -- inflation.

The author can be reached at larryhuangshuo@gmail.com.

http://www.chinadaily.com.cn/business/2010-11/15/content_11552427.htm

Sunday 14 November 2010

Vietnam: Goods prices escalating, people have to tighten their belts

Last update 10/11/2010 02:36:18 PM (GMT+7)


Goods prices escalating, people have to tighten their belts
VietNamNet Bridge – The prices of essential goods have been increasing sharply by 10-20 percent, or even 100 percent just over the past few weeks. But the actual income of regular employees does not increase.

Prices on the rise
Nguyen Thi Theu in Ngoc Thuy ward, Long Bien District, said that previously, she spent about 100,000 dong a day for the meals for five members of the family. she now has to spend no less than 130,000 dong a day for the same ingredients. Several hundreds of thousand dong would suffice for some essential goods.
Theu joked that sometimes she thought she must have dropped the money somewhere, because it ran out so quickly. “The problem is the prices have been increasing so rapidly,” she said.

Kim Oanh, 60, a housewife in the central district of Hoan Kiem in Hanoi, said that the prices have been increasing every day. Previously, Oanh regularly went to the small market near her house, where the prices were a little higher than the prices in other places. However, since the prices have been increasing so sharply, Oanh has decided to go farther to Ngo Sy Lien market which offers lower prices.

“I am now living with my son and his family. My son gives me three million dong more a month after he realized that the prices were on the increase. However, even with the additional money, I still have to tighten my belt,” she complained.

The prices of fresh food and vegetables have been rapidly increasing at all markets in Hanoi. Vegetables have become 20-50 percent more expensive, while the meat and fish prices have increased by 5-10 percent due to the short supply caused by the epidemics in the central region.

Big supermarkets in Hanoi such as Co-op Mart, Intimex, have increased the prices of many products since November, including sweets, cosmetics, clothes and household goods, after suppliers announced the 5-10 percent increases in October.

Meanwhile, many big stores on Hang Ma, Kham Thien and Nguyen Thai Hoc streets have warned customers about the price increases of 20-30 percent in days to come.

Traders on a knife-edge

Director of Minh Anh company, a big importer and distributor of sweets, and drinks, said the company had to raise the sale prices by 10-20 percent, after the euro increased to 28,000 dong per euro from 25,000 dong one month ago.

“The imports from Europe have become terribly expensive because producers have raised prices and the euro has appreciated. The Belgian partner has informed us of the 28 percent price increase,” the director said.

Analysts say despite the increase in the prices of sweets and drinks, the demand will not fall, because people will still have to purchase these products as the New Year 2011 and Lunar New Year are nearing, the time to give gifts to bosses and partners.

Meanwhile, the distributors of non-food products complain that the purchasing power is very weak.

The salesman of DigiWorld Shop on Hang Bai street, specializing in trading digital products, said since the dollar price has exceeded the 20,000 dong per dollar threshold, the purchasing power has dropped by 50 percent.

The sharp CPI increase of 1.05 percent in October has raised worries among the public. Dr Vu Dinh Anh, Deputy Head of the Ministry of Finance’s Market and Price Research Institute, said that if Vietnam cannot restrain the CPI in the last two months of the year, the CPI increase in the whole year 2010 would be at two-digit levels, 11 or 12 percent.

Nguyen Nga

Thursday 11 November 2010

Unknown consequences of QE2

Unknown consequences of QE2

2010-11-09 14:11
Unknown consequences of QE2
With oil hitting a two-year high, gold rallying to an all-time peak, and most global stock and commodities markets in a sharp upswing, the US Federal Reserve (Fed) has proved its capability to drive up the world's inflation expectations.
Yet, unfortunately, it remains unknown if the Fed's announcement last Wednesday to purchase $600 billion of Treasuries has any chance of succeeding in effectively reviving the sluggish US economy. Moreover, the second round of quantitative easing, or QE2, has given rise to international concerns that the move will only increase global economic uncertainty.
Last Friday, Zhou Xiaochuan, governor of China's central bank, pointed out that the Fed's move was "not likely" to benefit the global economy, because there may be a conflict between the international role and the domestic role of the US dollar.
The Fed's move to print more money may help boost employment and maintain a low inflation rate domestically, but it will bring a flood of liquidity to the global economy, especially to emerging economies, and drive inflation expectations to dangerous levels.
Last week, German Finance Minister Wolfgang Schaeuble criticized the Fed's capital-injection for its potential to "create extra problems for the world" and cause "long-term damage".
The German minister noted that the huge economic problems of the United States should not be tackled with more debt, as cutting deficits, rather than adding more, was one of the priorities among all developed countries.
Equally worried was Robert Zoellick, president of the World Bank, who even suggested a modified global gold standard to guide currency movements.
Admittedly, a return to using gold as an anchor for currency values is probably premature, even though gold prices are more solid than ever. But it is now quite obvious that the current international system cannot afford doing nothing about the latest US attempt to revive its economy with the help of the central bank's printing press.
If US policymakers turn a deaf ear to such international criticism over its latest attempt to stimulate its economy's slow recovery, they will risk undermining other countries' efforts to normalize their monetary and fiscal policies for a lasting recovery.
Worse, the phenomenal inflationary impact that QE2 has so far exerted on the global market could be just the tip of the iceberg. There will undoubtedly be unknown consequences of printing such a large amount of US dollars, a key international reserve currency that is widely used in international commodity trade, capital circulation and financial transactions.
The international community should make it an issue for serious discussion at the G20 summit in South Korea later this week. It is necessary to drive home the message that neither a country, nor the world as a whole, can reflate its way out of a crisis as wide and deep as the one that we are all still suffering from.

Thursday 12 August 2010

21 Evils of Inflation (Video)

http://video.google.com/videoplay?docid=-6484061137769305763&hl=en&emb=1#

21 Evils of Inflation - Prof. Krassimir Petrov
59:42 - 3 years ago
A 60 minute lecture by Prof. Krassimir Petrov at the American University in Bulgaria explaining 21 negative effects from inflation.

Tuesday 24 March 2009

Inflation explained

From Times Online
November 3, 2008

Inflation explained

David Budworth

Savers need to take the threat of inflation very seriously because it can erode the value of deposits at startling speed. If the value of your savings does not keep pace with rising prices, its buying power will be depleted quickly - and you may not be aware of it until it is too late.

Here we explain why inflation matters and what you can do to combat it.

What is inflation?

Inflation is a general rise in prices across the economy. The inflation rate is a measure of the average change over a period, usually 12 months.

There are two main measures. The consumer prices index (CPI) was adopted as the Government's preferred measure in 2003 and is used by the Bank of England for the purpose of inflation targeting. The target is 2 per cent, but inflation is currently a lot higher. In September it hit 5.2 per cent, which means that prices overall are 5.2 per cent higher than in September last year.

The oldest measure of inflation, the retail prices index (RPI), dates back to before the First World War. In September the RPI stood at 5 per cent.

What is the difference between RPI and CPI, and which is more useful?

The CPI excludes most housing costs. Rents are included, but house prices, council tax and mortgage payments are not. This usually means that CPI inflation is lower than RPI inflation, although this is not always the case.

Everyone should keep an eye on the CPI for an indication of whether interest rates are likely to rise or fall.

For anyone in receipt of a pension or benefits, though, the RPI is the one to watch because increases remain linked to the RPI rather than the CPI. Inflation-linked products, such as index-linked gilts, are also linked to the RPI.

Remember, though, that both of these official measures are calculated on the basis of an average notional shopping basket, but an individual’s spending patterns can differ dramatically. The Office for National Statistics has an inflation calculator that enables you to enter your personal expenditure patterns to calculate an approximate personal rate of inflation (see websites below).

Why does this matter to my savings?

Savings must grow by at least the rate of inflation to maintain their value. If they rise in nominal terms but fail to beat inflation, their real value will fall in terms of purchasing power.

With the CPI at 5.2 per cent, higher-rate payers need to earn at least 8.63 per cent gross interest before they start to make a positive return. Basic-rate taxpayers require at least 6.5 per cent.

If your savings account does not match or beat this rate you are effectively losing money.

Here is a guide to the interest that basic and higher-rate taxpayers need to earn to match inflation

Inflation rate of 5%

Basic-rate taxpayers need 6.25%

Higher-rate taxpayers need 8.34%

Inflation rate of 4%

Basic-rate taxpayers need 5%

Higher-rate taxpayers need 6.25%

Inflation rate of 3%

Basic-rate taxpayers need 3.75%

Higher-rate taxpayers need 5%

Inflation rate of 2%

Basic-rate taxpayers need 2.5%

Higher-rate taxpayers need 3.34%

Inflation rate of 1%

Basic-rate taxpayers need 1.25%

Higher-rate taxpayers need 1.66%

Do any savings accounts provide protection against inflation?

Index-linked savings certificates from National Savings & Investments (NS&I), which are backed by the Government, are tax-free and guaranteed to keep pace with the RPI for a fixed term.

The return is made up of a set interest rate plus the RPI figure, fixed for three or five years. You can invest up to £15,000 per issue, so you could shelter £30,000 in both the three and five-year plans.

You have to tie up your money for the fixed term to receive the advertised rate.

Look out for inflation-beating savings accounts and Isas from banks and building societies, too.


http://www.timesonline.co.uk/tol/money/reader_guides/article5001065.ece


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