Thread by @woodyfx44

1./ Inflation is a rise in prices, which can be translated as the decline of purchasing power over time. The rate at which purchasing power drops can be reflected in the average price increase of goods and services over time. #finance #investment #inflation #InflationReductionAct

2./ The rise in prices, which is often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods. Inflation can be contrasted with deflation, this occurs when prices decline.. #finance #investment #inflation #InflationReductionAct

3./ and purchasing power increases over time. While it is easy to measure the price changes of individual products over time, human needs extend beyond just one or two products. #finance #investment #inflation #InflationReductionAct

4./ Individuals need a big and diversified set of products as well as a host of services for living a comfortable life. They include commodities like food grains, metal, fuel, utilities like electricity and transportation, and services like health care, entertainment, and labor.

5./ Inflation aims to measure the overall impact of price changes for a diversified set of products and services. It allows for a single value representation of the increase in the price level of goods and services in an economy over a time period. #InflationReductionAct #Finance

6./ Prices rise, which means that one unit of money buys fewer goods and services. This loss of purchasing power impacts the cost of living for the common public which ultimately leads to a deceleration in economic growth. #finance #investment #inflation #InflationReductionAct

7./ Take coffee for instance. A cup of coffee was 25 cents in the 70s, in the 80s it rose to 45 cents and in 2000 it was a $1. Today in 2022 it is at $1.85 and will increase in the next 10 years. #finance #investment #inflation #InflationReductionAct

8./ To combat this, the monetary authority (like the central bank) takes the necessary steps to manage the money supply and credit to keep inflation within permissible limits and keep the economy running smoothly. #finance #investment #inflation #InflationReductionAct

9./ Theoretically, monetarism is a popular theory that explains the relation between inflation and the money supply of an economy. For example, following the Spanish conquest of the Aztec and Inca empires, massive amounts of gold and especially silver flowed into the Spanish..

10./and other European economies Since the money supply rapidly increased, the value of money fell, contributing to rapidly rising prices. Inflation is measured in a variety of ways depending upon the types of goods and services. #Finance #inflation #InflationReductionAct #invest

11./ It is the opposite of deflation, which indicates a general decline in prices when the inflation rate falls below 0%. Keep in mind that deflation shouldn't be confused with disinflation, which is a related term referring to a slowing down in the (positive) rate of inflation.

12./ So what are the causes of inflation? An increase in the supply of money is the root of inflation, though this can play out through different mechanisms in the economy. #Finance #investment #inflation #InflationReductionAct

13./ A country's money supply can be increased by the monetary authorities by:
-Printing and giving away more money to citizens
-Legally devaluing (reducing the value of) the legal tender currency
-Loaning new money into existence as reserve account credits through the banking..

14./ system by purchasing government bonds from banks on the secondary market. In all of these cases, the money ends up losing its purchasing power. The mechanisms of how this drives inflation can be classified into three types: #inflation #InflationReductionAct #Finance #invest

15./ These are: Demand-Pull Inflation, Cost-Push Inflation, and Built-in Inflation.
Demand-Pull Effect: this occurs when an increase in the supply of money and credit stimulates the overall demand for goods and services to increase more rapidly than the economy's production..

16./ capacity. This increases demand and leads to price rises. When people have more money, it leads to positive consumer sentiment. This, in turn, leads to higher spending, which pulls prices higher. #Finance #investment #inflation #InflationReductionAct

17./ It creates a demand-supply gap with higher demand and less flexible supply, which results in higher prices.
Cost-Push Effect: this is a result of the increase in prices working through the production process inputs. #Finance #investment #inflation #InflationReductionAct

18./ When additions to the supply of money and credit are channeled into a commodity or other asset markets, costs for all kinds of intermediate goods rise. This is especially evident when there's a negative economic shock to the supply of key commodities. #Finance #Inflation

19./ These developments lead to higher costs for the finished product or service and work their way into rising consumer prices. For instance, when the money supply is expanded, it creates a speculative boom in oil prices. #Finance #InflationReductionAct #investment #inflation

20./ This means that the cost of energy can rise and contribute to rising consumer prices, which is reflected in various measures of inflation.
Built-in Inflation: this is related to adaptive expectations or the idea that people expect current inflation rates to continue..

21./ in the future. As the price of goods and services rises, people may expect a continuous rise in the future at a similar rate. As such, workers may demand more costs or wages to maintain their standard of living. #Finance #investment #inflation #InflationReductionAct

22./ Their increased wages result in a higher cost of goods and services, and this wage-price spiral continues as one factor induces the other and vice-versa. There are other aspects of inflation that we shall get into later. #finance #investment #inflation #InflationReductionAct