Inflation Correction
Remember learning about annoying “context clues” in lit class? Well, it’s time to whip those skills out. Inflation correction might mean different things depending on the context.
If someone is taking a wage or price, and they’re “correcting for inflation,” it probably means they’re taking inflation out of the picture, mafia style. When inflation is taken out of nominal prices (the price on the sticker, or the number on the paycheck), we get what we call the “real” price or wage. It’s “real” because it doesn’t include inflation. Inflation makes prices and wages go up and down, so it can be hard to tell what the actual value of money is.
For instance, if you took a pay cut, but the prices of everything went down around you, there’s a chance you could still buy all of the same things just the same as before. That would mean your “real wage” hasn’t changed, because your buying power hasn’t changed.
Inflation correction might also mean when the government goes back and edits the official inflation numbers. It’s not because they’re actually controlling inflation (rewriting the books, per se), but because they got it wrong. In the US, we use the Consumer Price Index, or CPI, as the main way to measure inflation, but sometimes it’s a little off.
In that case, correcting inflation means the government’s saying “sorry, guys...inflation last month was a little different than we initially thought.”
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Finance: What is Inflation and How Does ...46 Views
Finance allah shmoop shmoop what is inflation and how does
it work This is inflation and this is inflation and
this is infiltration but really isn't relevant So get that
out of here okay The kind of inflation were referring
to is the kind where money gets more prolific so
that prices that have stayed steady well feel cheaper All
right now what the fuck does that mean Well when
economies are good and everyone is working getting paid able
to save money and buy themselves luxuries like ah waffle
maker that injects maple syrup directly into the waffle While
people tend to be willing to pay more to get
stuff they'll pay two hundred dollars a person for a
one day pass to disneyland They'll buy a second car
a flashy one that gets terrible mileage but will impress
the neighbors They'll buy this thing whatever it is because
it is heart Why not there's more money to go
around Products want to increase in price Ah home in
eighteen eighty and central california might have cost a thousand
bucks that same home today Well it's been remodeled a
couple times but it might cost a quarter million dollars
Or more but annual wage or salary in eighteen eighty
Might have been two hundred dollars So that house cost
five years Wages gruel forward to today in an average
wage is fifty grand And voila Well that home also
costs about five years Wages was their inflation Oh yeah
Big time Was there really cost increase in the house
will know you had to work the same amount in
eighteen Eighty is he do today to buy the same
house All right So why do people want inflation Like
why did money have to go up so much When
five yearswork buys the same today as it did one
hundred fifty years ago Psychology mohr is more which means
better So people simply like having a bigger number Over
time it comforts them to think that they're actually gaining
traction in the financial creek in which they are paddling
Perhaps more importantly governments want inflation Why Because they borrowed
tons and tons and tons of money But most of
the money the governments have borrowed is in fixed terms
or steady interest rate numbers That is the government agrees
to sell fifty billion dollars worth of debt at two
And a half percent interest We exist in a given
time period at a rate of two point five percent
inflation calculated as the existing costs of a basket of
stuff that people buy You know like milk paper towels
a six pack of bundy's dog treats heartburn medication that
waffle thing And so on Those and many other prices
air checked in dozens of stores averaged and totaled And
a gross number comes out each year In this case
the total basket of goods assessing inflation last year might
have been well let's say a hundred grand for simplicity's
sake This year that same total is one hundred two
thousand five hundred dollars that's How we got that two
point five percent annual inflation rate Okay so now there's
a shock to the system A bomb goes off in
a mini war start The economy booms his government's by
all kinds of us products In an effort to you
know kill one another The bomb making factories pay a
lot of overtime Toe workers who spend more save more
and inflation starts to happen all of a sudden that
carton of milk which used to be three boxes now
four bucks and everything else moves the same direction So
we go from a steady hundred year average rate of
about two and a half percent a year to now
suddenly a seven percent inflationary environment and that last for
five years before regressing to the mean of two and
a half percent So we have five years come Found
it at a four and a half percent increase in
inflation It quote made money cheaper unquote As for that
fifty billion bucks the government borrowed it still has to
pay the two and a half percent of your interest
on lee now it's relatively way cheaper to pay back
that loan You can imagine the case that brazil had
in desperately trying to pay back its loans many times
in the asked by inflating its currency i eat making
the federal borrowing rate from its treasury super cheap like
one percent or less It made borrowing easy for businesses
and individuals and in the process drove very high inflation
rate it's almost twenty percent a year on average for
a sustained period of time This means that the real
cost of debt drops by about fifty percent every three
And a half years or so and that the people
who loaned the brazilians money were very very p oed
might seem like inflation then it's just a dandy thing
to have It makes loans cheaper It lets everyone pay
off their bills quicker easier better The problem is that
what happens next time A government wants to borrow money
and they have a track record of letting inflation spiral
out of control Lenders just go away How deflating hey
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