Adaptive expectations is a theory that states individuals adjust their expectations of the future based on past events. This approach to predicting future events implies that people base their expectations on what happened in the recent past and modify them incrementally as new information arises.
Appreciation refers to an increase in the value of an asset over time, which can result from various factors such as inflation, a rise in market price, or interest earned. This term is essential for understanding the financial dynamics related to assets and currency values.
The seven-member managing body of the Federal Reserve System, commonly called the Federal Reserve Board, which sets policy on banking regulations and the money supply.
Bracket creep occurs when taxpayers move into higher tax brackets due to inflationary increases in their nominal income without a real increase in their purchasing power. This phenomenon increases government revenue without any changes in tax rates.
Capital flight refers to the large-scale exit of financial assets and capital from a country due to economic or political instability, or in search of higher returns elsewhere.
A rare object collected by investors, ranging from stamps, coins, oriental rugs, antiques, baseball cards, to photographs. Collectibles are often valued higher during inflationary periods, but they are not valid investments for IRAs and self-directed Keogh plans.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It is a critical indicator used to understand inflation and the cost of living.
The term 'core' has multiple definitions across various fields including technology, economics, and hardware, among others. This article provides a detailed definition, examples, frequently asked questions, related terms, and suggested resources for further study.
A Cost-of-Living Adjustment (COLA) is an increase in income that keeps up with the cost of living. It is typically used in wage contracts, pensions, social security benefits, and other financial agreements to counteract inflation.
A COLA is an adjustment in wages or benefits intended to offset changes in the cost of living, typically indexed to metrics such as the Consumer Price Index (CPI).
The Cost-of-Living Index is a tool that measures the relative cost of living over time or between different locations. It is typically used to compare the expense required to maintain a certain standard of living across various cities or countries.
A type of inflation caused by increasing prices, typically resulting from rising costs of production inputs such as raw materials and wages.
Government economic policies designed to dampen the effects of the business cycle, such as the Federal Reserve Board's action during the early 1980s inflation to raise interest rates and reduce demand.
Currency appreciation refers to an increase in the value of a currency relative to another currency, while currency depreciation refers to a decrease in the value of a currency relative to another currency. These concepts are pivotal in international trade, impacting everything from import/export prices to inflation rates.
Current Value Accounting (CVA) is a method aimed at providing an income statement and balance sheet in terms of current dollars, enhancing the quality of financial information during times of inflation.
Debasement is the act of deliberately rendering a currency less valuable, not through devaluation but by reducing the precious metal content of the coinage.
Deflation refers to a general decrease in prices across a range of goods and services. It is often associated with reduced levels of output, employment, and trade. Unlike controlled disinflation, deflation can have severe negative impacts on the economy.
A deflator is a statistical factor or device designed to remove the effect of inflation on economic variables, converting them into real, or constant-value, terms. It allows for a more accurate comparison across different time periods by accounting for changes in price levels.
Demand-pull inflation occurs when the aggregate demand in an economy outpaces the aggregate supply, leading to an increase in the general price level.
A critical adjustment in the value of a country's currency, devaluation can help rectify issues of overvaluation, uncompetitive exports, or an adverse balance of trade, amid the backdrop of a fixed exchange rate system.
Easy money refers to a state of the national money supply when the Federal Reserve System allows ample funds to build in the banking system, resulting in lowered interest rates and increased loan accessibility, which encourages economic growth and can potentially lead to inflation.
The Employment Cost Index (ECI) is a quarterly report issued by the U.S. Department of Labor that tracks changes in employer payroll costs including salaries, wages, benefits, and bonuses. It serves as a significant indicator for understanding trends in employment costs and potential inflation.
A method of inventory valuation in which cost of goods sold is charged with the cost of raw materials, semi-finished goods, and finished goods purchased 'first.' Under FIFO, the inventory contains the most recently purchased materials, and in times of rapid inflation, FIFO can inflate profits.
Fiscal policy involves the strategic use of government spending and taxation to influence a nation's macroeconomic conditions. It plays a crucial role in managing economic cycles by affecting demand, employment, inflation, and overall economic growth.
The Fisher Effect is an economic theory proposed by American economist Irving Fisher, which describes the relationship between nominal interest rates and real interest rates under the impact of inflation.
The General Price Level is an index that provides a measure of the purchasing power of money. It is used to gauge inflation or deflation in an economy.
A colloquial term for an economy that combines low inflation with steady economic growth. Such an economy is 'not too hot, not too cold, but just right,' similar to the porridge in the story of Goldilocks and the Three Bears.
Growth rate is a metric that illustrates the amount of change over a period in certain financial characteristics of a company, such as sales revenue or profits. It is usually expressed as a percentage and can be compared to the Retail Price Index or another inflation measure to evaluate the company's real performance.
Hidden inflation refers to a subtle price increase implemented by offering a smaller quantity or poorer quality of a product or service with no change in its original price.
Hoarding refers to the excess accumulation of commodities or currency in anticipation of scarcity and/or higher prices, often leading to market distortions.
A situation in which levels of inflation are so high that money becomes virtually worthless and monetary exchange breaks down. The appropriate accounting treatment is set out in Section 31 of the Financial Reporting Standard applicable in the UK and Republic of Ireland. UK listed companies must apply International Accounting Standard 29.
Ibbotson & Associates is a prominent provider of historical data for various financial investments, renowned for its annual publication 'Stocks, Bonds, Bills & Inflation.' This publication offers critical insights into long-term historical performance across various investment classes.
Government effort to control wages, prices, and costs by imposing wage and price controls, typically in response to unacceptable levels of inflation.
A general increase in prices in an economy, leading to a consequent fall in the purchasing value of money.
An investment designed to protect against the loss of purchasing power resulting from inflation, allowing investors to maintain the value of their money over time.
The International Monetary Fund (IMF) is an international organization established in 1944 to promote global monetary cooperation, ensure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
An investment strategy is a plan to allocate assets among various investment choices such as stocks, bonds, cash equivalents, commodities, and real estate. An effective investment strategy considers factors like interest rates, inflation, economic growth, the investor's age, risk tolerance, available capital, and future capital needs.
Keynesian Economics is a body of economic thought originated by the British economist John Maynard Keynes. Keynes asserted that government should manipulate the level of aggregate demand to address unemployment and inflation.
A monetarist is an economist who believes that the money supply is the key to the ups and downs in the economy. Monetarists, such as the late Milton Friedman, think that the money supply has far more impact on the economy's future course than, say, the level of federal spending.
Monetizing the debt refers to the process by which a government finances its national debt by printing new money, which often leads to inflation.
Money serves as a medium of exchange, a unit of account, a store of value, and a means for deferred payment. It has driven economic development by simplifying the exchange of goods and services.
The misconception that an increase in nominal income or wealth translates directly to an increase in real purchasing power, despite similar rises in price levels.
Income measured only in monetary terms, without adjusting for changes in purchasing power due to inflation or deflation.
A concept in economics representing the rate of unemployment at which the labor market is in equilibrium, and there is no inflationary pressure.
New Economics refers to revisions of Keynesian Economics that emerged in the 1970s, aimed at addressing economic issues inadequately managed by traditional Keynesian approaches.
The nominal interest rate is the rate of return on an investment that is unadjusted for the effect of inflation. It is distinguished from the real rate, which is the nominal rate less the rate of inflation.
Nominal wage refers to the amount of money earned by workers in current dollar terms, without adjusting for inflation or changes in purchasing power.
Overheating refers to an economic condition where rapid expansion leads to excessive inflation. It arises when demand outstrips supply, often causing price levels to increase.
The Personal Consumption Expenditures Price Index (PCEPI) is a U.S. economic indicator that measures the average increase in prices for all domestic personal consumption. This index is based on data from sources such as the Consumer Price Index and Producer Price Index, and it is indexed to a base value of 100 in 2005.
The Phillips Curve is an economic proposition stating that there is an inverse relationship between unemployment and inflation rates within an economy. As inflation increases, unemployment tends to decrease and vice versa.
A price index traces the relative changes in the price of an individual good, or a market basket of goods, over time. Common examples include the Consumer Price Index (CPI) and the Producer Price Index (PPI).
Price level refers to the average of current prices across the entire spectrum of goods and services produced in the economy. It is often utilized as a gauge to measure inflation or deflation by comparing it to previous time periods.
An accounting system designed to account for changes in general price levels (inflation or deflation), making it an alternative to historical-cost accounting.
Strictly speaking, to engrave and produce physical currency. Connotatively, it means adding to the supply of money and credit for the purpose of monetizing debt or stimulating spending, implicitly leading to inflation or, at worst, hyperinflation.
The Producer Price Index (PPI) measures wholesale prices across various stages of production and distribution before goods and services reach the consumer market. It is released monthly by the U.S. Bureau of Labor Statistics.
Purchasing power refers to the quantity and quality of goods and services that a given amount of currency can buy. Changes in purchasing power are influenced by inflation and deflation. This concept is crucial for both businesses and consumers as it impacts economic decisions and financial planning.
The 'purchasing power of the dollar' refers to the amount of goods and services that one dollar can buy in a particular market and time, compared to prior periods. This measurement considers inflation or deflation using an index of consumer prices.
Purchasing Power Parity (PPP) is an economic theory that estimates the currency exchange rates necessary in foreign trade situations so that each currency has the same purchasing power.
Purchasing power risk refers to the risk that inflation will erode the value of the currency in which an investment or deal has been made, effectively reducing the real return on investment over time.
Quantitative Easing 2, often abbreviated as QE2, was a controversial monetary policy program implemented by the U.S. Federal Reserve in 2010 to purchase $600 billion in U.S. Treasury bonds. The program aimed to reduce interest rates and stimulate economic growth but raised concerns about potential inflation.
Quantitative Easing (QE) is a monetary policy used by central banks to stimulate the economy when conventional monetary policy becomes ineffective. Primarily enacted during periods of low or zero interest rates, QE involves the creation of new money electronically to purchase government securities and increase the money supply.
Quantitative easing (QE) is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market to increase the money supply and encourage lending and investment.
Explore the concept of the ratchet effect, where an economic variable, such as prices or wages, undergoes an irreversible change. Understand how temporary pressures can have lasting impacts on the economy and contribute to inflation.
Real GDP, or Real Gross Domestic Product, measures the value of economic output adjusted for price changes (inflation or deflation).
Real Purchasing Power reflects the value of a currency in terms of the quantity of goods and services it can buy, adjusted for inflation. It provides a more accurate measure of financial well-being by accounting for changes in price levels over time.
The real value of money refers to the actual purchasing power of money as corrected for inflation over time.
Real wages refer to money wages that have been adjusted for inflation, providing a measure of the actual changes in purchasing power over time.
An index reflecting the prices of goods and services in retail shops purchased by average households, calculated relative to a base year. The RPI is a key economic indicator published monthly by the Office for National Statistics.
The Retail Price Index (RPI) is a measure of inflation published monthly by the UK government. It indicates the rate of price change for a fixed basket of goods and services, which reflects the spending habits of households.
Runaway refers to being out of control, typically used in reference to inflation or other undesirable economic phenomena.
The savings ratio, also known as the savings rate, is a financial metric that measures the proportion of disposable income that individuals or households save rather than spend on consumption. This ratio is typically expressed as a percentage and reflects the preference balance between present and future consumption.
Stagflation refers to a period where an economy experiences stagnant growth while simultaneously facing high inflation. This economic anomaly challenges conventional economic theories which typically expect inflation to rise during periods of high economic growth or vice versa.
Annual publication by Ibbotson & Associates that provides long-term historical data on various financial instruments including stocks, bonds, treasury bills, and inflation.
Wage control involves measures to regulate the extent to which wages can be increased, typically in percentage terms, and is usually implemented during periods of governmental wage and price restraints to achieve national priorities like controlling inflation.
A macroeconomic phenomenon where rising prices push wages higher, which in turn increases production costs and leads to further price increases, creating a feedback loop.
Wage-push inflation is an inflationary situation in which increasing wages are not offset by rising productivity, leading to higher production costs and, consequently, increased prices for goods and services.
