Transcript Inflation

INFLATION
SSEPF3
Marsh
UNIT 4
The Benefit and loss from
inflation
What is inflation:
Inflation is defined as
a sustained increase in
the general level of
prices for goods and
services. It is measured
as an annual
percentage increase. As
inflation rises, every
dollar you own buys a
smaller percentage of a
good or service.
Benefit:
If inflation is controlled,
it leads to increase in
investment and
business growth. When
people are afraid of
further inflation and the
loss of money's buying
power, they will spend it
today. This leads to an
increase in demand for
goods and services,
leading to higher
production, which in
turn generates
employment and further
income.
Loss:
As prices rise, the buying power or
purchasing power of your income or
wealth go down.
Thus during inflationary times real
income and real wealth go down.
Money losses its value. Higher the
inflation, lower the value of the dollar,
and vice-versa
The real income of the fixed
income earner's goes down. If
you have a fixed nominal
income, as prices go up, your
purchasing power (or real
income) goes down. Only if
your earnings are indexed to
inflation (as social security
checks) will one be insulated
from the negative effects of
inflation.
Winners
Fixed-rate mortgage holders.
"They're going to be paying back with devalued dollars,"
Auto-loan holders.
Auto-loan holders who bought before inflation and locked in a
relatively low interest rate benefit from high inflation because they pay
off a sizable debt with devalued dollars, says Nancy Lowenberg, a
financial adviser with Hiawatha, Iowa-based Securian Advisors
MidAmerica.
Investors in stocks. Stockholders get some protection from inflation
because the same factors that raise the price of goods also raise the
values of companies.
"Theoretically, the value of equities varies directly and proportionally
with inflation," Thoma says. "When you double all prices and wages,
you double profits and you double the value of stocks, basically.“
Winners
Small-business owners with big fixed-rate debts. As prices for
products go up, small-business owners find themselves better able to
manage fixed-rate debt from investments in equipment and other
business necessities, Lowenberg says.
"Think about a business that's expanding and borrows money to put in
state-of-the-art equipment so that it can grow," Lowenberg says. "If
inflation is higher than normal, and they're getting paid more for their
product because raw material prices were up and they're paying their
workers more, they're paying the debt back in stable dollars.“
Winners
Investors in commodities. Bankrate senior financial analyst Greg
McBride says commodity prices track the inflation rate closely. Buying
storable commodities such as gold can be a good hedge against
inflation.
Losers
The American economy. High inflation historically has hurt the
American economy, McBride says. "If you look at periods of strong
growth in U.S. history, the one constant has been a very modest rate of
inflation over that time."
In periods of high inflation, consumers' purchasing power falls and
their standard of living slides with it.
Also, borrowing to fund new businesses, buy homes and finance other
tasks necessary for a healthy economy becomes more difficult as
lenders jack up interest rates to hedge against further inflation.
Losers
People living on fixed incomes, such as a retirement or pensions.
For example, when the food budget covers only the cost of 2/3 of the
food it used to, people have to make a choice. Less food? Give up
something else? There will have to be a choice, and a trade-off.
Credits http://www.bankrate.com/financ
e/investing/winners-and-losers-ifinflation-skyrockets1.aspx#ixzz3qSwwJCPQ
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and loss from inflation