The Effect Of Inflation On An Investment

The inflation rate is constantly changing every day. The entire investment community is always on the look out for what the future inflation rate may be. It has been proven that a healthy economy preforms best when inflation rate is

The interest rates are expected to reach 7.0% by June, the most severally effected by these constant raises are shareholders. Because of these immediate effects market economists are largely against the interest rate hikes. Their position is that the average inflation rate over the past three years has been at around 2% close to the markets expected inflation rate of 1.9%. The economy is on a sixteen year run, continually moving forward. The historical data is there however; the consumer price index was at 1.6% over the past twelve months and the March year over year rate was at 3.7%

1. What is inflation? Inflation is an increase in prices for goods and services (What is Inflation?).

The United States inflation rates are a problem, if the government were to control them then the United States would flourish from a “B+” economy to a “A” economy. In the United States (September, 2015) consumer prices went up 1.5%,

1). In 2016, the inflation rate was at 2.07 percent, and as of February 2017 the rate is about .90 percent (“Inflation Rate,” n.d.). As we can see, the economy has bounced back from its position during the recession. GDP has increased drastically since 2009, unemployment has decreased past its position from 2007, the interest rate has risen, and inflation has also gone up which indicates a strong and healthy economy. Although a higher interest rate is unfavorable for consumers and businesses, it means that the government is confident that the economy will continue to improve. This also means that consumers have enough disposable income to spend on whatever they wish, so the government does not need to lower the rate in order to encourage borrowing and spending. These metrics indicate that the economy has recovered from the Great Recession, and is continuing to improve.

As the inflation rate rises, I will have to redistribute my income. I would have to be stricter with my spending habits compared to an economy that has a low inflation rate. As the prices of everything around me starts to go up, I will have to be able to adjust my spending habits to make sure that my necessities are taking care of and that I am still able to spend more. By the inflation rates going up, this can have a negative impact on some manufacturers. As inflation goes up, I will not be the only person in the economy cutting back on unnecessary spending and be stricter with my money. A perfect example is when the price of gas took a significant increase during the mid-2000s. Car manufactures started to see that people were spending less on purchasing cars. Another reason why I will have to stricter with my money after a significant increase in inflation rates is the idea that I may be impacted by a pay cut or completely laid off.

In economics, with the inflation is a rise in the actual general level of prices of goods and services in an economy from over a period of time. When the general price level rise, such as each of the units currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power4 per unit of money. This therefore means that with the loss of real value in the medium of exchange and unit of account within the given and actual economy. With a chief measure for example and the price of inflation is within the given inflation rate, the annualised percentage change within a general price index over time in which is normally the consumer price index.

When is the last time we experienced deflation (prices actually dropped- you will have to go back a few decades)?

According to the US Inflation Calculator (2017), the current inflation rate is 2.7% as of February 28, 2017. This is the rate at which consumer goods rise in price per year. An inflation rate between two and three percent is beneficial for an economy because it encourage consumers to buy and borrow more. This means that the government and central banks strive to meet a limited level of inflation (The Economic Times, 2017). The consistent inflation rate is positive

If inflation is moving upwards of the 1 to 3 per cent target range, that is usually

Concern for People: The most inflation will have effect on general people. People having fixed incomes will experience the reduced purchasing power and have to pay more to buy the same goods and services than in the past. The cost of living will go up.

Inflation is another term for power risk. It’s the cash that flows from an investment but won’t be worth as much in the future.

Inflation and interest rates are often synonymous in the fact that one impacts the other. Interest rates in the United States are determined based on three variables; time value of money, reimbursement risk and power of inflation (What’s the Relationship Between Inflation and Interest Rates?, 2009). Essentially, the higher the inflation rate, the higher the interest rate. With inflation in the United States remaining low, bank interest rates will keep currencies at a constant with minimal fluctuation in value. This has both negative and positive effects on the economy. Borrowers (i.e. homebuyers, students needing loans, etc.) benefit from this; whereas the investors are not making what they did 20 years ago when interest rates were profitable (Appendix

A lot of literatures have already studied about the inflation and inflation prediction and in this paper literature review will be discussed from the theoretical aspect and empirical aspect. The researches of the inflation, which are studied, by a lot of scholars in the field of economics have been conducted for a long time especially during the 1970s and it is the heyday when people would like to pay more attention to research the inflation. The inflation has become a hot topic among the economic life and social life since 1987. However, no matter whether it is in the western economic field or in the Chinese economic field, people have different definitions on the inflation and so far there is no unified opinion and conclusion can be accepted generally by everyone. For example, Wyplosz and Burda (1997), Blanchard (2000), and Barro (1997) define that inflation is a sustained rising in the overall price level of products and services in an economy throughout the time period. By contrast, Zha and Zhong (2016) define that inflation is considerable as the mechanism to improve economic growth. In general, the common definition of the inflation is that the inflation is a continuous rising process in the aspect of price. In other words, the value of the currency decreases continually.

I Poonam Pillai hereby declare that the term paper report titled study on Inflation in India that I have submitted is original. I was in regular contact with nominated guide and contacting him for discussing the project.