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Question about Inflation & Money

  1. Mar 6, 2016 #1
    Hi everyone:

    I have a few questions relating to inflation and money, which my roommate and I were talking about over dinner and into breakfast this morning.

    First, is there any way to track inflation each year? As in, how do you know how much inflation of the dollar took place for a year or is taking place at any one time?

    Secondly, if you have money and want to put it into an investment or the bank, do these places always beat inflation? If not, is there a way to know beforehand, so you can avoid that place to park your money?

    Lastly, is there any way to know how much inflation would take place before it does for any given year?

    Thank you all for your help.
  2. jcsd
  3. Mar 6, 2016 #2


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    You try to buy some fixed set of products and compare how much it costs. Not so easy as the consumption changes over time (e. g. the set of products 20 years ago didn't include mobile phones, and the available mobile phones change from year to year) and due to various other challenges, but that is the basic idea.
    Some investments can even lose money, but on average, if they don't beat inflation they are bad.
    If you would know in advance which investment is good and which one is not, ...
    There are estimates, of course.
  4. Mar 6, 2016 #3


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    Various government agencies collect statistics on inflation. The table at the link shows monthly inflation rates for the U.S. dating back to 1914:


    Purchasing power is one way to gauge inflation, but governments are not immune to manipulating the typical basket of goods to reflect an artificially low rate of inflation, since high rates of inflation get consumers mad at politicians for sapping their savings thru rapidly depreciating currency.

    In the U.S., the Consumer Price Index is one figure which is bandied about publicly, but this indicator has not in recent times included the cost of food or fuel, because the prices for these items have swung wildly between extremes as oil prices peak and then suddenly decline as new supplies come to market.
    The return on investment for a particular vehicle is dependent on many different factors. For example, the interest you earn on savings accounts is determined to a large extent by how much a government's central bank will charge a merchant bank to borrow funds from it. Currently, interest rates on most ordinary savings accounts is minuscule, and barely above the rate one would get by shoving their savings into a mattress (i.e., zero).

    Only if you have a trusty crystal ball.
  5. Mar 6, 2016 #4

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    As Will Rogers once said, "To make money, buy some good stock, hold it until it goes up, and then sell it. If it don't go up, don't buy it."
  6. Mar 6, 2016 #5


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    Inflation is tracked through the price of a market basket of goods and services that are considered basic needs for households. The Consumer Price Index is issued monthly and maintained by the Bureau of Labor Statisitcs.


    Prices of food and energy are left out of the CPI because they are highly volatile and can distort the measurement of a trend.

    The government issues inflation indexed bonds whose interest rate adjusts with inflation - maybe the CPI, not sure.
    Gold is considered to be an inflation safe haven.
    Many pensions are pegged to inflation.

    Regular bonds decrease in value with perceptions of higher prices. They are thought to contain an inflation expectation and an inflation risk premium. These change with perceptions of future inflation and can be be completely different than the actual inflation that ends up happening.

    The job of the Federal Reserve and other central banks is to promote sustained economic growth. Many target inflation directly by changing the short term borrowing rate for banks - in the US this is the Federal Funds Rate. Higher short term rates discourage bank lending and thus dampen inflation, lower short term rates stimulate bank lending. There is no science to this and some have argued that the Central Banks actually make inflation worse.

    No. But many experts devote their energy to predicting the Federal Funds Rate which is determined in part by perceptions of near term inflation. Fed Watchers attempt to predict how Fed will respond to economic data and measures of inflation such as CPI are key. A look at Fed Funds futures contracts going out about two years provides a market consensus on Fed policy action. A look at options on Fed Funds futures gives the market perception of uncertainty in Fed Policy action. A simple mathematical procedure allows one to derive the probability distribution.

    In modern deregulated markets, Central Bank action is constrained by the amount of leveraged positions it believes exists. A rise in borrowing rates can aggravate or even cause a deleveraging event that risks unwanted economic slowdown and even deflation. Rather than gently moderating economic activity the central bank can trigger a sudden dramatic decline. This makes it difficult for the central bank to moderate inflation and economic growth through changes in short rates.
    Last edited: Mar 6, 2016
  7. Mar 6, 2016 #6


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    The US Bureau of Labor Statistics compiles the Consumer Price Index (several versions of it, actually), and publishes historical statistics on their web site. For a table showing the CPI month-by-month going back many years, see table 24 in the current Detailed Report (first item listed on the page below).


    No. Historically, in the US, the stock market as a whole has beaten inflation over long periods of time (20-30+ years), but with frequent temporary declines as large as 50% or more (e.g. 1929 or 2008-2009). The safest way to get this performance is to invest in a broadly based mutual fund, e.g. Vanguard's Total Stock Market Index, and stick with it for the long run. Don't trade in and out to try to catch the peaks or avoid the dips; if this gives you better performance, it will be purely by luck.

    Individual stocks of course can and do go to zero as companies go bankrupt.

    For stocks, I've used TIAA's CREF Stock Account in my tax-deferred retirement plan at work for more than 30 years; outside of that plan I use Vanguard Total Stock Market which covers US stocks, and Total International Stock Market which covers the rest of the world.

    Bonds issued by companies can have nice interest rates, but with individual bonds, if the company goes bankrupt, you'll lose all or part of the principal. I prefer to use a broadly based bond mutual fund, e.g. Vanguard's Total Bond Market Index, which is currently giving me dividends of about 2-2.5%.

    At banks, 5-year (maybe even 2-year) certificates of deposit (CDs) have interest rates that are currently above inflation (which is currently practically zero). However, when inflation rises, as everyone has been saying is "just around the corner" for the past seven years :rolleyes:, you'll have to pay a penalty to withdraw the money early, to invest it somewhere else, or (gasp) spend it.

    [ugh, I got beat by three people while I was typing this.]
    Last edited: Mar 6, 2016
  8. Mar 6, 2016 #7


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    Of course, this refers to the price that you get for a bond if you sell it to someone else before it matures. If you let it mature, you're contractually guaranteed to get the principal back, unless the issuer has gone bankrupt in the meantime.
  9. Mar 6, 2016 #8


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    That is true but if inflation rises over the life of the bond then the principal is worth less at maturity.
  10. Mar 6, 2016 #9


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    OK, you were referring to inflation. I was thinking of the fact that the resale price of a bond (in nominal terms, disregarding inflation) decreases when interest rates on new bonds increase above the rate of the bond in question. That is, the bond has to sell at a discount in order for other people to be interested in buying it.
  11. Mar 7, 2016 #10
    Inflation is a hidden tax on the people. If you ignore Keynes and agree with Von Mises, there should be no inflation. Government interference in markets through the Fed's Open Market Committee distort asset allocation, and cause boom and bust economic cycles. Inflation results from the increase in money supply with no corresponding increase in productivity. The Fed and fiat currency are to blame for your reduced purchasing power. Since 1913 (creation of the Fed), the dollar has lost 95% of its purchasing power. In other words, what cost a nickel in 1913 cost a buck today. However true money (gold) is about the same in inflation adjusted dollars. A good suit cost about 1 oz of gold in 1900. Today a gold coin will buy you one nice Italian suit ($1300).

    The gubmint is totally dishonest in its core inflation index. While commodity prices have fallen over the last year, look at health care costs, and education costs. The inflation there is astronomical.
  12. Mar 7, 2016 #11
    I lived overseas for ten years. They told me that inflation was minimal, 1% or so. When I returned the price of everything had doubled.

    Social Security payments are pegged to the inflation index, so the US gov't has a gartantuan incentive to keep the inflation index artificially low.
  13. Mar 7, 2016 #12


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    Please post your sources. Thank you.
  14. Mar 7, 2016 #13


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    That should be easy to prove/disprove. Pick a few products and tell us the actual price differernce (with sources). How about oil...?

    Inflation is far from a perfect tracking tool, but let's not overblown the criticism beyond the reality.
  15. Mar 7, 2016 #14
    The main thing I noticed was that that price of food had doubled. Just about all small-scale consumer goods: books, restaurants, clothes. Big drop in quality too. In Bali quality of manufactured goods was so poor it was a waste of money to buy anything. The US isn't like that, but definitely a big drop. Buying rain pants that rip within the first hour, that kind of thing. It took me a couple of years to get used to the doubled prices. I no longer notice it.

    Oil had doubled too, though of course lately that's regressed. Saudi Arabian Aramco is hurting so bad from low prices it's going public! Unreal. I don't see how this can happen at all, much less sustain itself.
  16. Mar 7, 2016 #15
    OK, "The Creature from Jekyll Island" Edward Griffin, it's a great read on the history of banksters from the first Bank of England to present. However, this information is prevalent in the news and might be considered common knowledge. Are we required to cite sources for what might be considered common knowledge? I am new to this forum, and don't want to upset the apple cart.
  17. Mar 7, 2016 #16
    Give that person a ceegar. It's sad that they exclude the two things we consume the most of.
  18. Mar 7, 2016 #17
    When I went to college in the 1980s, my tuition was about $30/cr hr plus a textbook about $100. When I attended graduate school in the 1990s, graduate hours were about $100/ cr hr. When I sent my son to college in the 2010s, tuition was over $300 with texts about the same. Did the cost of education and printing books really appreciate that fast? BTW, this is my own experience so no sources cited.
  19. Mar 7, 2016 #18
    I have read that book. It's OK, but has a consistently negative tone. I prefer "Secrets of the Temple" by William Greider.

    This is a pet topic of mine, but I avoid discussing it because it is such an emotional focus. The system evolved over time by trial and error. You have to know that history to understand it. The Roman, English, and French empires. Alexander Hamilton. The First Bank of the United States. War of 1812. Second Bank of the United States. Andrew Jackson. JP Morgan. The "cross of gold." The Federal Reserve. The Great Depression. The World Wars. Going off the gold standard. Savings&Loan crisis. Bank deregulation. Repeal of Glass-Steagall. Mergers. Meltdown. It's a lot like physics: if you don't have the background, you're out of the debate. Like relativity, economics is counter-intuitive. Common sense does not work.

    Almost all of what I read are proposals to revive obsolete systems that seem reasonable but have worked badly in the past. I don't think anyone is in love with the Federal Reserve banking system, but it's workable. It's better than what preceded it. Surely there is room for improvement, but there is so much secrecy it is hard to say what that would be. If you are interested in that, check out Elizabeth Warren. That's her specialty.

    There are some really weird things out there. Like Milton Friedman, a man who stated that the child labor laws should be repealed. He thought discrimination on the basis of race, religion, and ethnic background was a good thing and should be restored. That might have been the most "can he really be saying this" experience of my life. This is the most influential economist of his generation? It's like bad science fiction. But real. Or Alan Greenspan, who believed markets would be self-regulating. How could anyone believe that? After 2008 he changed his mind. Better late than never.

    Today's top economists are paid lots of money. Decide for yourself whether or not to trust what they say.
  20. Mar 7, 2016 #19
    I agree with you about the history. I think the most fundamental thing someone ought to know about the banking system is that fractional reserve banking is basically a check kiting scheme. If you or I were to engage in this activity, we would be sent to prison for fraud. Yet the banksters get to do it year after year. When the banks can't cover their liabilities, the taxpayer continuously bails them out. We never learn our lesson. We continue to let them maintain their reserve requirements at 10%.
  21. Mar 7, 2016 #20


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    Try to get the equivalent of your current computer in 1980. There is no price tag because such a thing did not exist at all, not even as room-filling supercomputer. But even if you take a reasonable home computer back then and a reasonable home computer today, you get the opposite trend.

    Do you get the same education today as you got it 1980?

    There are things that get much cheaper and other things that get much more expensive, and even more things that are hard to compare because today you get completely different things than decades before.
  22. Mar 7, 2016 #21
    I'm not sure what your point is. Somebody asked for specific examples of inflation. I used the cost of education as an example. The cost increased c.a. 300% in 30 years. That surely outpaced core CPI inflation over the same period.
  23. Mar 7, 2016 #22
    I'd have to try it to find out. But having taught a course at a prestigious college in 1991, I thought the whole way statistics was taught was way outdated. It was unchanged since 1950, as far as I could tell, and I would be surprised if anything was different today. Somebody writing on a whiteboard while the students copy it down! I imagine that that's how it was done in Roman times.

    We were forcing the students to memorize computational procedures that are now always performed by computers. I'm sure these were all forgotten immediately after the test.
    Last edited: Mar 7, 2016
  24. Mar 7, 2016 #23
    What you say is true. But I think fractional reserve banking works very well in practice. Much of our prosperity we owe to it. In short, I think cheap money is far superior to expensive money.

    It worked fine before Bentsen, Rubin, and Panetta repealed Glass-Steagal and so forth. Just like the S&Ls worked fine before they were deregulated. Just like the Canadian bank system worked fine in 2008. Nobody worried about banks when I was a kid. Banks were boring. They never caused trouble.
  25. Mar 7, 2016 #24


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    The claim was that "the price of everything doubled" in 10 years. That's pretty straightforwardly false, and picking a couple of items that got more expensive unusually fast doesn't change that (it was, perhaps, a poor choice of request). The government is very transparent about how the CPI is calculated.

    The difficulty with inflation (tracking the value of money over time) is that money doesn't have value unto itself. Money is worth what it can buy you. So really, tracking the value of money means tracking the cost of things it buys. That is, in fact, how inflation is calculated.

    The problems with that should be obvious:
    1. No two people buy the same things. So the agency tasked with tracking inflation needs to come up with a "typical" assortment of goods/services to track. And as should be obvious:

    2. The assortment of goods tracked will change over time. But it is even worse than that:

    3. The value of those goods changes over time. Sometimes it is obvious that they are different (an average car today is much different from an average car in the 1970s), but it is rarely obvious exactly how different they are.

    So, inflation is a very imperfect measure and it is debatable - but it is still useful and it is nowhere near as flawed as is being claimed here.

    Also, the claim of a 1% inflation rate for the past 10 years was false too.
    Here's inflation data for the last century:

    The average rate over the last 10 years was about 2% per year, even including the 0% preliminary rate based on one quarter of 2015.
    Last edited: Mar 7, 2016
  26. Mar 7, 2016 #25
    I disagree with fractional reserve banking as works well in practice. There have been too many bank failures in this country alone to say it works well. As far as the cost of capital, it should be set by the demand and supply curves rather than an arbitrary and perhaps capricious Fed Board.
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