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Inflation, what's it for?

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HarryAlffa
750073.  Thu Oct 07, 2010 10:26 am Reply with quote

It's a target rate of depreciating your money.
That's what it's for, but how does that promote economic growth?

 
CB27
750092.  Thu Oct 07, 2010 11:35 am Reply with quote

Inflation is not something that someone in the Government or BoE or anywhere else decides it is, it's determined by several factors.

Inflation has been around with us since even before mankind, and exists in the natural world.

People and organisations can manipulate the inflation rate of an economy up to a certain extent, but in the globalised world we live in today, international influence has a lot of influence as well.

 
Posital
750127.  Thu Oct 07, 2010 2:00 pm Reply with quote

If all the currencies entered the X-factor and it's put to a telephone scoring system. It's simply the change in the average of the score each currency is expected to get.

But it doesn't tell us who the winner is...

 
djgordy
750207.  Fri Oct 08, 2010 4:00 am Reply with quote

CB27 wrote:

Inflation has been around with us since even before mankind, and exists in the natural world.


I wasn't aware that mastodons and mammoths used money.

Kenysian economists believe that there are advantages in low or moderate levels of inflation. Principally, they believe that it allows the real value of wages to fall over time allowing the labour market to reach equiibrium.

It is also thought to encourage investment. If there was no inflation then people could just keep their money under the mattress. If there is inflation in the economy people have to invest their money in order to keep up with or, preferably, outpace, inflation. If there is deflation in the economy, then people stop buying things because they hope that prices will fall even further and economic activity falls.

The desire of people to keep their investments up to or above the level of inflation also allows governments to control, to some degree, economic activity by means of manipulating the interest rate.

Inflation has varied through the ages. There was a relatively high rate of inflation in the 15th-17th century which is believed to have been caused by the gold and silver that came over from America.

There is a list of historical UK inflation rates here though note the caveat.

http://www.whatsthecost.com/historic.cpi.aspx

High inflation rates are often associated with wars. The high rate in 1817 (13.5%) was probably due to 1816 being "the year without a summer".

http://en.wikipedia.org/wiki/Year_Without_a_Summer

 
gruff5
750223.  Fri Oct 08, 2010 5:57 am Reply with quote

CB27 wrote:
Inflation has been around with us since even before mankind, and exists in the natural world.

Inflation in the modern era in the USA has been around since Nixon took the dollar off the gold standard in 1971. For the UK it was a few decades earlier when the BoE took the pound off the gold standard.

It's difficult to measure the "intrinsic value" (whatever that is) of gold, but it is thought that it changes little over time. For example, an ounce of gold bought a quality tailored suit in the middle ages and will do the same today.

 
CB27
750227.  Fri Oct 08, 2010 7:02 am Reply with quote

inflation is about value. The fact we allocate value to money today doesn't mean other things don't have value.

The value of gold in itself is a good example of how inflation can be caused by external forces. When Spain plundered the New world and brought back so much gold, they thought it would help their economy, but what it created instead was a spiralling inflation because Europe was suddenly awash with gold.

In nature you sometimes find animals and plants that "trade", and they can experience an inflation in the value of certain objects/parts which sometimes mean changing behavious, and at times can even mean evolving further.

 
Neotenic
750231.  Fri Oct 08, 2010 7:26 am Reply with quote

Quote:
Inflation in the modern era in the USA has been around since Nixon took the dollar off the gold standard in 1971. For the UK it was a few decades earlier when the BoE took the pound off the gold standard.


Again with the gold standard!

Inflation has been around for waaaay longer than the 1970's and - as this graph should go some way to prove - was rather more volatile before that point.



I think that particular graph shows quite neatly how inflation is influenced far more by global events - especially those that either interfere with or cause uncertainty over the global supply chains than by monetary policy.

By and large, monetary policy (in particular the setting of interest rates) is an attempt to mitigate against the effects of these global events that can cause volatile inflation (or indeed deflation) rather than drive it itself.

 
HarryAlffa
750261.  Fri Oct 08, 2010 8:55 am Reply with quote

gruff5 wrote:
Inflation in the modern era ...

Note the bit that says "modern era". It clearly doesn't mean inflation didn't exist waaaay before then.

The graph show spikes in inflation around global events. Big surprise.

gruff5 wrote:
It's difficult to measure the "intrinsic value" (whatever that is) of gold, but it is thought that it changes little over time. For example, an ounce of gold bought a quality tailored suit in the middle ages and will do the same today.


Nice stat.

 
Neotenic
750271.  Fri Oct 08, 2010 10:03 am Reply with quote

Quote:
For example, an ounce of gold bought a quality tailored suit in the middle ages and will do the same today.


I'm not sure how you'd really go about quantifying that - not least because there's not one uniform price for a suit.

here is a timeline on the price of a Troy Ounce of gold from ft.com (although you may need a subscription to access it)

It shows that the value of gold has gone from under $400 to over $1,000 per TO in the last ten years - have suits undergone the same level of price volatility?

 
djgordy
750280.  Fri Oct 08, 2010 10:37 am Reply with quote

HarryAlffa wrote:
gruff5 wrote:
Inflation in the modern era ...

Note the bit that says "modern era". It clearly doesn't mean inflation didn't exist waaaay before then.


Over at Emporio Uggi..."yes Mrs. Ergg, I'm sure that your mother did buy a sabre tooth tiger coat from us 12 winters ago for three shells and a woolly rhino horn but times change. You're going to have throw in 2 wheels and the secret of fire for the same thing nowadays."

 
gruff5
750452.  Sat Oct 09, 2010 6:45 am Reply with quote

Neotenic wrote:
I'm not sure how you'd really go about quantifying that - not least because there's not one uniform price for a suit.

Well, i did say it was difficult to quantify the "intrinsic value" and this is as good a measure as any. You might say a bushel of wheat today looks like a bushel of wheat from the middle ages - but that might be a worse price marker, given how the labour required to produce a bushel of wheat has plummeted (due mainly to finite oil-based agriculture)

Neotenic wrote:
It shows that the value of gold has gone from under $400 to over $1,000 per TO in the last ten years - have suits undergone the same level of price volatility?


No, i expect quality suits have stayed reasonably constant. But the value of gold bounces around a mean value over longer periods; the bouncing is often due to the global-events effect you mention. Whereas fiat currencies (ie those backed by nothing) inexorably inflate over time until they eventually combust in hyperinflation and become worthless.

I think the original poster asked how inflation contributes to growth? I've done no research on this, but isn't GDP measured in the national currency, and so if you have inflation, you inevitably have "growth" measured in that currency?

 
HarryAlffa
750535.  Sat Oct 09, 2010 11:44 am Reply with quote

Hi gruff5,
The "inflation gives growth" thing, was something said over dinner conversation. While most kind of thought they may have heard something of this before, no one could say how it did it (if this was the case).

I have a sneaking suspicion that its more to do with banks shaking the populace down ... somehow!

 
Neotenic
750636.  Sat Oct 09, 2010 6:28 pm Reply with quote

Quote:
Well, i did say it was difficult to quantify the "intrinsic value" and this is as good a measure as any.


It's difficult to measure the intrinsic value of some things - like companies. But gold is a commodity. Therefore, the intrinsic value is nothing more than what people are prepared to give you in return for it - be that money, goods or services.

Quote:
(due mainly to finite oil-based agriculture)


It's also worth pointing out that gold is an equally finite resource.

Quote:
Whereas fiat currencies (ie those backed by nothing) inexorably inflate over time until they eventually combust in hyperinflation and become worthless.


I don't think it's quite as inevitable as you may like to. And no, Zimbabwe would not be any form of evidence that it is. It's evidence that it is possible, yes, but you have to take some truly lunatic decisions to get there.

Quote:
I've done no research on this


Well that much is true.

Quote:
isn't GDP measured in the national currency, and so if you have inflation, you inevitably have "growth" measured in that currency?


It doesn't matter what unit of measurement you use. Water is not hotter if you measure it in Fahrenheit than it is if you measure it in Celsius, even if the numbers are higher.

Also, inflation is a measure of price. In fact, it is multiple measures of price. In the UK, we use two - RPI can CPI, and have used different measures in the past. Even the way RPI is calculated is altered periodically, as goods are added and removed from the 'basket' which is used to measure prices.

Inflation does not necessarily feed into an increase in the money supply, either - and would not be taken into account in the M3 calculation of money supply. If anything, it's the other way around.

And not only that, the size of the money supply does not form part of the calculation for GDP, which is a measure of economic activity.

Oh - finally - whilst GDP may well be reported in domestic currencies internally, they will be converted into a single currency (usually US$) for international comparison.

 
exnihilo
750990.  Mon Oct 11, 2010 2:57 am Reply with quote

A cursory glance at almost any history book will show that inflation has been a constant issue, I'm not sure I follow any of the arguments here which suggest otherwise. It's not some capricious invention of government.

 
Neotenic
750995.  Mon Oct 11, 2010 3:08 am Reply with quote

Quite - inflation is a measure of a phenomenon, not a tool in itself.

One does not boil water by manipulating a thermometer.

 

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