Topic: Inflation and Deflation of Price and Money Supply - page 2. (Read 1424248 times)

I personally prefer an approach of adjusting my personal financial preferences and needs, for example saving some of our wealth in physical property and this was also done by people before us (our parents before) and this can also be considered as one of the smart steps in mitigating this incident. The bottom line is that properties often increase in value over time.

Inflation is defined as the increase in the price levels of goods and services in an economy. Deflation is termed as the decrease in price levels of goods and services in an economy. Impact on demand. Demand for products and services decrease in deflation. Inflation is an invisible thief it keeps you under the illusion that your money is safe but actually keeps reducing money's value. To stay safe from this inflation we need to invest our money in right things like Gold ETF, Share market etc. Investment doesn't only save you from losing the real value of money of its purchasing power, at the same time its's also help economy to grow faster and stronger.

I may be looking at it wrong, but I am very curious about what inflation does to the value of bitcoin - and I am deep in this rabbit hole. Lets say everyone in the world would accept bitcoin, and You wanted to buy 1 tonn of aluminium from me. We would both look at the value of bitcoin in for example dollars... yes? At this point in the future the price of 1 bitcoin would be 1M$, and that is what 1 tonn of aluminium would be worth at that time. So we trade 1 tonn aluminium for 1 bitcoin. Next year the government would have printed so much money so the market price of 1 tonn aluminium now would cost 1,5M$... For this example lets just say that 1 bitcoin would still be worth 1M$. Then I would want 1.5 bitcoin for the same amount of aluminium, therefore bitcoin has lost its value even when the price is the same.

Am I overthinking this? Is it so easy that if I would accept aluminum in bitcoin, then the price of aluminium would be in bitcoin instead of dollars? Or would it be better to have something else that would give a value of a product or service like for example energy?

Will we see an example of what will happen in real life soon if the BRICS start trading oil with other currency then the dollar?

Inflation and Deflation Remain Major Concerns for Global Economy in 2023, Prompting Central Banks to Take Action"

 
Inflation and deflation are two important economic concepts that have significant impacts on the overall health of the economy. Inflation refers to a sustained increase in the general price level of goods and services in an economy, while deflation refers to a sustained decrease in the general price level. Both inflation and deflation can have significant impacts on consumers, businesses, and policymakers.


High Inflation Rates in 2023: Causes and Impact on Economies
As of 2023, inflation remains a major concern in many countries around the world. In the United States, for example, the consumer price index (CPI) increased by 7% in 2022, the largest increase since 1982. This has been driven by a number of factors, including supply chain disruptions, increased demand for goods and services as economies reopen, and government stimulus spending.

High Inflation Rates in 2023: Causes and Impact on Economies

Inflation can have a number of negative impacts on the economy. For one, it can reduce the purchasing power of consumers, meaning that their money buys less over time. This can lead to reduced consumption and lower economic growth. Inflation can also increase the cost of borrowing, which can make it more difficult for businesses and individuals to access credit.

Central Banks Take Action to Manage Rising Inflation

In response to rising inflation, central banks around the world are taking action to try to manage the situation. The U.S. Federal Reserve, for example, has begun to raise interest rates and reduce its bond-buying program. Other central banks, such as the European Central Bank, have also signaled that they may need to begin tightening monetary policy in response to inflationary pressures.

Deflation as a Potential Risk in Some Economies: Causes, Effects, and Strategies for Avoiding a Vicious Cycle of Falling Prices and Reduced Economic Activity

While inflation is currently a major concern, deflation remains a potential risk for some countries. Deflation occurs when the general price level decreases over time, which can lead to reduced demand for goods and services as consumers delay purchases in anticipation of even lower prices in the future. This can create a vicious cycle of falling prices and reduced economic activity.

Inflation Continues to Plague Economies in 2023: Causes and Effects of Rising Consumer Prices, with a Focus on the United States

One country that has been struggling with deflation for years is Japan. The Bank of Japan has implemented a range of measures to try to stimulate inflation, including negative interest rates and asset purchases. Despite these efforts, inflation in Japan has remained stubbornly low, hovering around 1% or less for much of the past decade.

Managing Inflation and Deflation in a Rapidly Changing Economic Environment: Challenges and Uncertainties Ahead

Overall, policymakers are still grappling with how to manage inflation and deflation in a rapidly changing economic environment. The ongoing COVID-19 pandemic, geopolitical tensions, and other factors continue to create uncertainty and pose challenges for economic stability. It remains to be seen how central banks and governments will continue to respond to these challenges in the years to come.

 

Inflation should be only 2%. In Italy we are about 12,9 %. A way to much.

You are absolutely right that inflation is never good because it leads to increase in prices of goods, services & energy/fuel products & makes life of common men difficult.
High inflation also results in interest rate increase which pushes up cost of borrowing, hence cost of doing business goes up and leads to reduction in profit of corporate sector, as well as causes cost push-inflation, and adds to further increase in prices of goods  .
The bottom line is that, high inflation rate indicates that economy is not doing well and necessary measures are required to be taken to bring it down to reasonable level to boost economic growth.

inflation is never good and its own number is highly manipulated

did you know they say "the food group of CPI is 3%"

what is not realised is certain food is used as an index
and some retailers keep those particular items low. while raising the rest

EG
01.1.1 Bread and cereals
01.1.2 Meat
01.1.3 Fish
01.1.4 Milk, cheese and eggs
01.1.5 Oils and fats
01.1.6 Fruit
01.1.7 Vegetables including potatoes and tubers
01.1.8 Sugar, jam, syrups, chocolate and confectionery
01.1.9 Food products [n.e.c.]

by keeping retailer own brand bread low
certain meats low
certain brands of milk low
certain fruits low

they can raise the rest higher

for instance
own brand baked beans stays (in UK) at £0.25/can
but branded heinz tomato soup, spaghetti increase by 50% £1.50 a can compared to £1 last year

cherry tomatos stay at $0.80
but fresh beef tomatos go up by 50%

this way by showing some items only move by 10% and other items by 0. they can fake a 3% inflation on food. even though an average persons grocery receipt has grown by 25-30%

yet their salary/wage has not increased by 20%-30%
even if inflation pretend food has only increased by 3%

Well said. Inflation is the result of increase in money supply but it is not always bad because in inflationary situation people spend money to buy good and services which creates jobs and stimulates growth in economy while deflation means no growth in economy, that is why governments reduce interest rates in deflationary situation to increase money supply to stimulate growth.

The bottom line is inflation at reasonable level is not so bad but when it goes extremely high ( in 2 digits or above like in Turkey & many other developing countries inflation is 70%) then it becomes difficult to buy food and energy for common people of the country.
 

This is really an educative post and I have learnt alot from this post and that's the most interesting point about this forum. Before now I have another view towards inflation and deflation of an economy

these two things, namely inflation and deflation are indeed commonplace in a process of running an economy. and even a controlled inflation is also needed in a process of running an economy and market flows. so it can be said that inflation is also divided into two parts. namely controlled inflation and uncontrolled inflation. although today some people mistakenly think that the word inflation is a bad thing. whereas inflation can not always be considered bad if it is controlled inflation. and what should be worried and considered bad is uncontrolled inflation. as is currently the case. because uncontrolled inflation indicates the economy is not doing well (economic crisis). and many factors that cause inflation to become out of control. and it's been mentioned a lot in this thread. Inflation and deflation are something that continues to happen in an economy.

but the types and levels that distinguish them.
Such as the type of inflation that is still under control (at low to medium levels), and the type of inflation that has started to get out of control which continues to increase rapidly (usually called the heavy inflation level - hyperinflation).

Inflation and deflation are common things in the country's economy, of course the biggest influencing factor is the circulation of money and supply, when the amount of money in circulation continues to increase, it is certain that inflation will occur. must be able to control both.

Perfectly explanatory post!

I would like to add just a little info that helped me a lot to frame out the analytic functioning of inflation/deflation through monetary policy, that is the notion provided by the Quantity theory of money.

It basically relies on a simple mathematical law, that in its exemplified form is known as equation of exchange:




Where

M is the money circulating supply,
V is the velocity of money, or the frequency of transactions in a given period of time(basically how fast money flows in the economy),
P is the average price level,
Q is the real value of goods.

The left-hand member of the equation is the money supply (MS = MxV), while the right-handed one is the money demand (MD = PxQ) and the relation between the two basically states that in an economy all the actors cannot spend more than how much all the actors produce (gain).
Note that MD can also be referred to as the nominal GDP.

Assuming V and Q as constants, (the velocity of circulation of a simple medium of exchange V depends on consumers habits, and the value of goods Q is produced in a situation of full employment -Fisher- and objective), if the monetary policy maker decides to inject money in the system, alias printing new money (increasing the value of M value in the equation), in order to maintain the law (equation) prices must necessarily increase proportionally (Increasing the P value in the equation).

This increase of P is what we call inflation.

If instead of increasing M, we decrease it (destroy money), in order to keep the law valid prices (P) must decrease as well, proportionally. That is what we call deflation.

This model gives an analytic reason on why abundance of money leads to inflation, while scarcity leads to deflation, and why Bitcoin tends to gain purchasing power (facing decreasing supply over time, thus decreasing purchasing price levels for goods, that is to say higher value for itself), while FIATs tends to loose it (facing increasing supply, thus increasing price levels for goods, or lower value for itself).

As most of crypto  investors & enthusiasts perceive that Bitcoin is fundamentally hedge against inflation like Gold & silver but unfortunately during the past more than 6 months we have witnessed strong co-relation between stock market and Bitcoin. Both markets rise and fall simultaneously, both have similar reaction to CPI/interest rates announcement which  is very hard to understand & find any convincing logic behind this surprising  functionality.

An easy-to-understand explanation. In the last sentence, the macroeconomic is mentioned so I have a wonder that these factors like disease can affect in supply, demand of crypto?

No, that's not true. Demand measurement is simple. We don't have to track trades to measure demand. A very simple way is to organize data on the blockchain.

No need for the price of goods and services to calculate any cryptocurrency demand. The demand we want to calculate should be "base token demand". Calculating this may not be very good for btc maxi.

It is possible to address inflation issue and bring it down by money tightening policy. This is what FED is doing and recent data of CPI reflects that this policy is working as CPI is on decline and may decline further as crude prices are also falling which might help to stop further increase in interest rate . The best hedge against inflation is Bitcoin which can not be printed more than 21 Million.

My take on inflation currently is its a constant ongoing force with varied time frames.   We can have retractions short term in a counter trend but the overall effect is continually towards the benefit of government debt.   Deflation will raise the cost of servicing debt, the FED has a large fear of that feedback effect but both sides of the spectrum are destructive to GDP.   Inflation we rise nominally but we arent gaining anything.


Its not quite true, people can and do setup their own businesses and experience exceptional growth.   The fastest growth in almost any country comes from the smallest entities not the largest global mega corps despite their advantages from economies of scale the country as a whole requires the smallest participants to be able to do well.

When government is passing in yet more red tape they do usually have the good sense to exclude the very smallest of business from the constant drag of government, I think its usually maybe 50 or less employees are spared requirements.   That can create a problem later but at least that company is likely able to stand before being weighed down further.    In some countries I've heard its very common to run a (startup) business from a car in order to constantly travel and evade the crushing force of government upon any private enterprise.  People might assume that means they are not legal but the business Im referring to is just normal trade in household goods yet its opposed by the giant size of government unfortunately.

Exactly, if you are like the majority of people, you don't own assets that produce enough passive income to sustain your lifestyle. Thus, the only options you have left is to either put in more hours --> get a second job/side-hustle or upskill yourself to secure a better paid position be it at the same workplace or in another company.

Like Buffett said - in a inflationary environment "The best thing you can do is to be exceptionally good at something."
Of course we can't just say hocus-pocus and we become the best in the field, but you can always start working to attain that.

Time and again people keep on complaining about inflation. But with every passing day the prices will increase. There is no end to it.
The only solution is to earn more money - work a little more harder and do a side hustle too. EArn More  Earn More  Earn More. This is only solution.

Economics is a very young field and sometimes are even self fulfilling prophecy. Even keysian economics used to be all about taxation and less on supply.

Always be wary of Austrian economists, because they are priori thinking based, while Keysians and Monetarists etc are far more scientific and data driven with math models.
The latter can be broken down and analyzed, the former is basically theories. That also makes Austrian theories easier to sell, but they have been extremely poor at predicting any recession for example.
Some part of The Austrian Theory of the Business Cycle are pretty easy to disagree with too, they said business can handle fluctuations but not gov induced credit expansion, which is simply wrong because everyone made decision based on prediction of future rate. If anything, it is even more predictable. Government policy is largely very predictable, even more so than volatility of gold supply.

At the end, central banks are focused on factors outside money. The economic growth, employment rate and inflation. i.e. the well functioning of the society (in economic terms)
Inflation will always be here to stay, but it isn't difficult to build wealth because of this.