Inflation confuses me.

[Majan]

I know what inflation is; I'm just albeit mystified by it. If a million dollars is worth $200,000 in forty years, does that mean I need to save five million dollars to retire as a millionaire? Also, everything is supposed to go up in price but that's not true. Electronics are much cheaper now than they were ten years ago. Maybe it's because they're made in other countries such as China? Houses, healthcare, food; etc have gone up. But a lot has not.

What if we happen to have a few years of deflation? I'll shut up now.

[sweeps]

Re: Inflation confuses me.

Be sure not to confuse inflation with supply and demand. The fact that electronics become cheaper and healthcare becomes more expensive has to do with supply and demand. Generally speaking, when the supply of money in the economy is higher than it needs to be, the demand for all goods increases, which allows companies to increase prices, which results in inflation. (Note this is not always true as in the case of "inferior" goods and services such as Ramen noodles. When people get more money they demand things like steak and lobster and use less Ramen noodles. The same thing goes for driving the car or taking a flight versus riding on the bus.) Electronics prices typically go down because the supply goes up over time.

Deflation is bad because when demand drops, companies have to lower prices. Then consumers anticipate that prices will go lower in the future, so they stop buying. When they stop buying, companies have to lower prices. Also during this time, typically people get laid off further reducing their incentive to buy. The cycle continues until something gets the economy moving again.

[mstrohm]

Re: Inflation confuses me.

Go ahead and try to figure it all out, but be sure of this: You need more to retire than you think!!

[PRICEPLUS]

Re: Inflation confuses me.

Amen to that!

[Broken Arrow]

Re: Inflation confuses me.

Yeah, inflation confuses me as well, as it is a heady topic. Sweeps has done a better job explaining it than I can, but all that I will add is that a well-regulated inflation is actually healthy for our overall economy. Hyper-inflation and deflation is bad.

Please also keep in mind that inflation affects things across the board. Generally speaking. What I mean is, even though something may cost double the amount in the future as it does now, our annual income for the same job that we do now should also have doubled in the future as well, due to said inflation. Investments should have a similar effect.

I know it's a gross over-simplification, but the point is that people often times become too fixated on a fixed number. In this case, it's the number 1,000,000. In fact, what we should focus on is to increase our buying power.

And if I may ramble on some more, buying power isn't something that we have to wait for the Fed boards to make a decision. No, by simply increasing our earnings and spending less, we can enhance our buying power, how ever small that may be.

In a sense, buying power is also similar to "value" when we shop around. It's not the exact dollar amount that matters. It's how much it's worth to us versus how much they want for it.

The price of technology has to do with the blistering pace at which it advances. Personally, I don't think that's a bad thing at all because... I like technology and it makes it more affordable to me. However, advancements in technology doesn't directly correlate to inflation. Not directly.

Different countries have different "buying power" if you will. In places where the standard of living is low, you can pay them "less" than you can pay them more here. Believe it or not, while offshoring jobs may be a bad thing for the average folks wanting jobs, it's actually good for our overall economies as it keeps the cost down. Indirectly, this cost-saving may be passed down to the consumer in a competitive market. This, in turn, COULD increase our own consumer buying power.

I'm not saying I'm a political proponent of offshoring or anything, but just making an observation in our global economy.

I'm just rambling, and I'm not even sure of half of that made any sense, so please take it for what it's worth.

[sweeps]

Re: Inflation confuses me.

Here's another example that might help. Let's say the U.S. Mint went on a tear and printed a bunch of money and gave every citizen $1 million. You'd think, great, let's start spending. Well, unfortunately every one else would be thinking the same thing. No one's going to work for what they were making before, so they quit or at least demand much, much higher wages. But stuff still has to get done -- you still need janitors, babysitters, road construction crews, TV repairmen, garbage collectors, etc. So companies - and ultimately you - have to pay much much higher prices for these services. This causes prices of goods and services to rise, essentially making the whole thing a wash over the long term.

This is basically how inflation works (but of course not quite as dramatically as my example above).

To complicate matters, this is demand-pull inflation, as opposed to cost-push inflation. When oil prices rise, for example, the costs to business increase without an increase in consumer demand. In that case, prices go up because of a drop in supply.

Again, it all comes down to supply and demand.

[b4freedom]

Re: Inflation confuses me.

How many hours do you need to work to buy a house?

Let’s assume that you take out a mortgage for $100,000 @ 7% for 30 years. Your monthly payment would be $665.30.

Let’s assume that you make $20/hour and that you’re employer annually adjusts your salary for inflation. Let’s assume an inflation rate of 3% a year.

In order to pay your mortgage you would need to work 33.27 hours. Because your salary is adjusted for inflation, the following year you would need to work 32.3 hours in order to pay your mortgage. Assuming this continues, during the 30th year you will only need to work 13.70 hours/month in order to make your payment.

[vsjhoc]

Re: Inflation confuses me.

But stuff still has to get done -- you still need janitors, babysitters, road construction crews, TV repairmen, garbage collectors, etc.

Thanks for the clear explanation.

BTW, when was the last time you saw a TV repairman??? These days, TVs have a longer shelf life , and people are only too happy to throw out the old stuff and get new stuff rather than get it fixed.

[sweeps]

Re: Inflation confuses me.

Actually with $1,000 - $5,000 TVs out nowadays, you might be surprised at how many TV repair guys there are. But point taken, it was a dumb example. Feel free to replace it with your choice of occupation.

[vsjhoc]

Re: Inflation confuses me.

Actually with $1,000 - $5,000 TVs out nowadays, you might be surprised at how many TV repair guys there are. But point taken, it was a dumb example. Feel free to replace it with your choice of occupation.

Not a dumb example at all. Just making a comment on our throw-away society. But I'm sure there's a strong demand for TV installers.

[jmjj215]

Re: Inflation confuses me.

To inflation, the WSJ posted today that:

Oil prices set a Nymex record of $75.19 amid supply concerns, though prices have been much higher in inflation-adjusted terms.

[VJW]

Re: Inflation confuses me.

The only trouble with that much-sited statistic is that it would be a valid point only if Americans wages kept up with inflation. Big Oil likes to say that the current price of gasoline is relatively “cheap” because adjusted for inflation it was higher in 1981. However, the inflation-adjusted wages of the vast majority of Americans went backwards by almost 20% during the 12 years of the Reagan/Bush administrations (1981-1992), and although that was reversed during the eight years of the Clinton administration (1993-2000) with the fastest and longest inflation-adjusted wage growth since the 1960s, that was reversed again over the last five years with inflation-adjusted wages going backwards once again. So for the consumers of gasoline, the real cost of gasoline (and oil and heating oil) is higher than ever.

It’s this stealthy loss of one’s Standard of Living that is indeed a confusing aspect of inflation to many people, as they don’t realize that it’s happening to them.

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[b4freedom]

Re: Inflation confuses me.

The only trouble with that much-sited statistic is that it would be a valid point only if Americans wages kept up with inflation. Big Oil likes to say that the current price of gasoline is relatively “cheap” because adjusted for inflation it was higher in 1981. However, the inflation-adjusted wages of the vast majority of Americans went backwards by almost 20% during the 12 years of the Reagan/Bush administrations (1981-1992), and although that was reversed during the eight years of the Clinton administration (1993-2000) with the fastest and longest inflation-adjusted wage growth since the 1960s, that was reversed again over the last five years with inflation-adjusted wages going backwards once again. So for the consumers of gasoline, the real cost of gasoline (and oil and heating oil) is higher than ever.

It’s this stealthy loss of one’s Standard of Living that is indeed a confusing aspect of inflation to many people, as they don’t realize that it’s happening to them.

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Are you saying that the Republicans are making Americans poorer via inflation?

[boefixepa]

Re: Inflation confuses me.

Okay, here's how I keep it straight in my head and try not to get headaches.

I look at the vaule of the goods. The dollar amounts/pay amounts are just used as a comparison figure, that's why money was invented in the first place.

If the value of my work/earnings gets me the same 'stuff' then there is no inflation.

If I have to work two hours to get the same 'stuff' then yeah, inflation has happened.

I've seen gold used as a base line too. An ouce of gold will get you the same goods today (in the comparison I've read 'a good men's suite') as it did 'XX' amount of years ago.

Money, currency exchanges, stock markets, intrest rates, inflation, past vaule of money, future value of money, supply, demand, macro vs. micro economics, all those nice 'economic terms' are great. However, they complicate things like no other. Not to mention all the different theories out there about how things work. I feel a vast majority of it is just propaganda anyway. They tell us what they want us to believe. (By the way, the world is NOT going to run out of oil.)

I like to bring it back to simple concepts that are easier for me to work with. I have a very limited control of things when I look at the big picture. Somehow I don't think Bush is going to impliment my personal budgeting ideas. (Wouldn't it be nice.) So I have to work with the situation I have been give. No matter what I do I personally CAN NOT control inflation. Trying to understand it in detail is going to give me a headache. So where does that leave me.....

1. Make sure any savings are out pacing inflation so that my buying power does not decrease.

2. Do my best to make sure my wages increase as fast if not faster (yeah right) than inflation.

3. IF I can not do #1 transfer my savings into commidities that are not as effected by inflation. (IE property, gold, and I'm sure there are more, but those are the easy ones.)

4. Make sure I have planned the best I can to be affected by inflation as little as possible. - A good example of this would be knowing when and when not to purchase items especially big ticket items and knowing when to buy because inflation in likely to happen and having enough money to do so.

Okay I'll think I'll stop now, hopefully you get the idea of what I'm saying.

[VJW]

Re: Inflation confuses me.

Are you saying that the Republicans are making Americans poorer via inflation?

Well, I was explaining why those that claim gasoline is cheap in inflation-adjusted dollars fail to consider that the ‘Standard of Living’ of Americans has declined over the same period of time, and that most people do not realize it is happening to them.

However, yes, indirectly the data does definitely indicate that the vast majority of Americans had their inflation-adjusted wages go backwards during the 12 years of the Reagan/Bush administrations, as well as the first four years of the current administration.

Is this a result of failed RightWing economic policies ? Given that during the intervening eight years when those failed RightWing economic policies were reversed, Americans experienced the fastest and longest inflation-adjusted wage growth since the 1960s, yes that would be my conclusion.

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