Inflation

Inflation is a rise in the general level of prices over time. It may also refer to a rise in the prices of a specific set of goods or services. In either case, it is measured as the percentage rate of change of a price index.

Mainstream economists believe that high rates of inflation are caused by high rates of growth of the money supply. Views on the factors that determine moderate rates of inflation are more varied: changes in inflation are sometimes attributed to fluctuations in real demand for goods and services or in available supplies (i.e. changes in scarcity), and sometimes to changes in the supply or demand for money. In the mid-twentieth century, two camps disagreed strongly on the main causes of inflation at moderate rates: the "monetarists" argued that money supply dominated all other factors in determining inflation, while "Keynesians" argued that real demand was often more important than changes in the money supply.

There are many measures of inflation. For example, different price indices can be used to measure changes in prices that affect different people. Two widely known indices for which inflation rates are reported in many countries are the Consumer Price Index (CPI), which measures consumer prices, and the GDP deflator, which measures price variations associated with domestic production of goods and services.

Related definitions

Related economic concepts include: deflation, a general falling level of prices; , a decrease in the rate of inflation; hyperinflation, an out-of-control inflationary spiral; stagflation, a combination of inflation and rising unemployment; and reflation, which is an attempt to raise prices to counteract deflationary pressures.

In classical political economy, inflation meant increasing the money supply, while deflation meant decreasing it (see Monetary inflation). Economists from some schools of economic thought (including some Austrian economists) still retain this usage. In contemporary economic terminology, these would usually be referred to as expansionary and contractionary monetary policies.

Causes of inflation

In the long run inflation is generally believed to be a monetary phenomenon while in the short and medium term it is influenced by the relative elasticity of wages, prices and interest rates. The question of whether the short-term effects last long enough to be important is the central topic of debate between monetarist and Keynesian schools. In monetarism prices and wages adjust quickly enough to make other factors merely marginal behavior on a general trendline. In the Keynesian view, prices and wages adjust at different rates, and these differences have enough effects on real output to be "long term" in the view of people in an economy.

A great deal of economic literature concerns the question of what causes inflation and what effect it has. There are different schools of thought as to what causes inflation. Most can be divided into two broad areas: quality theories of inflation, and quantity theories of inflation. Many theories of inflation combine the two. The quality theory of inflation rests on the expectation of a seller accepting currency to be able to exchange that currency at a later time for goods that are desirable as a buyer. The quantity theory of inflation rests on the equation of the money supply, its velocity, and exchanges. Adam Smith and David Hume proposed a quantity theory of inflation for money, and a quality theory of inflation for production.

Keynesian economic theory proposes that money is transparent to real forces in the economy, and that visible inflation is the result of pressures in the economy expressing themselves in prices.

There are three major types of inflation, as part of what Robert J. Gordon calls the "triangle model":

# Demand-pull inflation: inflation caused by increases in aggregate demand due to increased private and government spending, etc.

# Cost-push inflation: presently termed "supply shock inflation," caused by drops in aggregate supply due to increased prices of inputs, for example. Take for instance a sudden decrease in the supply of oil, which would increase oil prices. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices.

# Built-in inflation: induced by adaptive expectations, often linked to the "price/wage spiral" because it involves workers trying to keep their wages up (gross wages have to increase above the CPI rate to net to CPI after-tax) with prices and then employers passing higher costs on to consumers as higher prices as part of a "vicious circle." Built-in inflation reflects events in the past, and so might be seen as hangover inflation.

A major demand-pull theory centers on the supply of money: inflation may be caused by an increase in the quantity of money in circulation relative to the ability of the economy to supply (its potential output). This is most obvious when governments finance spending in a crisis, such as a civil war, by printing money excessively, often leading to hyperinflation, a condition where prices can double in a month or less. Another cause can be a rapid decline in the demand for money, as happened in Europe during the Black Plague.

The money supply is also thought to play a major role in determining moderate levels of inflation, although there are differences of opinion on how important it is. For example, Monetarist economists believe that the link is very strong; Keynesian economics, by contrast, typically emphasize the role of aggregate demand in the economy rather than the money supply in determining inflation. That is, for Keynesians the money supply is only one determinant of aggregate demand. Some economists consider this a 'hocus pocus' approach: They disagree with the notion that central banks control the money supply, arguing that central banks have little control because the money supply adapts to the demand for bank credit issued by commercial banks. This is the theory of endogenous money. Advocated strongly by post-Keynesians as far back as the 1960s, it has today become a central focus of Taylor rule advocates. But this position is not universally accepted. Banks create money by making loans. But the aggregate volume of these loans diminishes as real interest rates increase. Thus, it is quite likely that central banks influence the money supply by making money cheaper or more expensive, and thus increasing or decreasing its production.

A fundamental concept in Keynesian analysis is the relationship between inflation and unemployment, called the Phillips curve. This model suggests that there is a trade-off between price stability and employment. Therefore, some level of inflation could be considered desirable in order to minimize unemployment. The Philips curve model described the U.S. experience well in the 1960s but failed to describe the combination of rising inflation and economic stagnation (sometimes referred to as stagflation) experienced in the 1970s.

Thus, modern macroeconomics describes inflation using a Phillips curve that shifts (so the trade-off between inflation and unemployment changes) because of such matters as supply shocks and inflation becoming built into the normal workings of the economy. The former refers to such events as the oil shocks of the 1970s, while the latter refers to the price/wage spiral and inflationary expectations implying that the economy "normally" suffers from inflation. Thus, the Phillips curve represents only the demand-pull component of the triangle model.

Another Keynesian concept is the potential output (sometimes called the "natural gross domestic product"), a level of GDP, where the economy is at its optimal level of production given institutional and natural constraints. (This level of output corresponds to the Non-Accelerating Inflation Rate of Unemployment, NAIRU, or the "natural" rate of unemployment or the full-employment unemployment rate.) If GDP exceeds its potential (and unemployment is below the NAIRU), the theory says that inflation will accelerate as suppliers increase their prices and built-in inflation worsens. If GDP falls below its potential level (and unemployment is above the NAIRU), inflation will decelerate as suppliers attempt to fill excess capacity, cutting prices and undermining built-in inflation.

However, one problem with this theory for policy-making purposes is that the exact level of potential output (and of the NAIRU) is generally unknown and tends to change over time. Inflation also seems to act in an asymmetric way, rising more quickly than it falls. Worse, it can change because of policy: for example, high unemployment under British Prime Minister Margaret Thatcher might have led to a rise in the NAIRU (and a fall in potential) because many of the unemployed found themselves as structurally unemployed (also see unemployment), unable to find jobs that fit their skills. A rise in structural unemployment implies that a smaller percentage of the labor force can find jobs at the NAIRU, where the economy avoids crossing the threshold into the realm of accelerating inflation.

Rule of 72

In finance, the rule of 72, the rule of 71, the rule of 70 and the rule of 69.3 are methods for estimating an investment's doubling time or halving time. These rules apply to exponential growth and decay respectively, and are therefore used for compound interest as opposed to simple interest calculations.

The Eckart-McHale Rule (the E-M Rule) provides a multiplicative correction to these approximate results, while Felix's Corollary provides a method of estimating the future value of an annuity using the same principles.

Using the rule to estimate compounding periods

To estimate the number of periods required to double an original investment, divide the most convenient "rule-quantity" by the expected growth rate, expressed as a percentage.

# For instance, if you were to invest $100 with compounding interest at a rate of 9% per annum, the rule of 72 gives 72/9 = 8 years required for the investment to be worth $200; an exact calculation gives 8.0432 years.

Similarly, to determine the time it takes for the value of money to half at a given rate, divide the rule quantity by that rate.

# To determine the time for money's buying power to halve, financiers simply divide the rule-quantity by the inflation rate. Thus at 3.5% inflation using the rule of 70, it should take approximately 70/3.5 = 20 years for the value of a unit of currency to halve.

# To estimate the impact of additional fees on financial policies (eg. mutual fund fees and expenses, loading and expense charges on variable universal life insurance investment portfolios), divide 72 by the fee. For example, if the Universal Life policy charges a 3% fee over and above the cost of the underlying investment fund, then the total account value will be cut to 1/2 in 72 / 3 = 24 years, and then to just 1/4 the value in 48 years, compared to holding the exact same investment outside the policy.

Impian

Mungkin satu kebiasaan bagi kita apabila ingin mengejar sesuatu impian, kita akan mendapat banyak halangan. Orang akan berkata tidak, dan semua perkara tidak menjadi seperti yang dirancangkan. Jangan biarkan ianya mengubah momentum dan semangat anda.

Cuba ambil contoh George Lucas. Ramai yang tidak tahu pada mulanya George memujuk Marvel Comics untuk membuat filem tentang Flash Gordon, dan mereka langsung tidak ambil peduli. Dan akhirnya, setelah berkali-kali permintaannya ditolak, beliau membuat Star Wars.

Daripada halangan tersebut, beliau mengeluarkan produk yang menghasilkan billion US dollar, daripada filem, video games sehinggalah kepada pakaian. Seluruh dunia tergilakan aksi Star Wars! Inilah hasilnya selepas matlamat utamanya ditolak.

Jangan ambil hati apabila gagal. Anda mempunyai misi anda sendiri, matlamat dan impian yang jelas. Jangan biarkan orang lain yang menolak permintaan anda untuk melemahkan semangat anda. Anda perlu fokus dan teruskan. Anda mempunyai sasaran dan anda mesti capai walaupun halangan menunggu. Ingat, selepas gagal kali pertama anda pelajari daripada kelemahan itu dan perbaiki untuk masa akan datang.

Apabila seseorang berkata tidak kepada anda, tanya kepada diri anda apa yang boleh anda pelajari daripadanya. Apa perubahan yang perlu supaya mereka berkata ya kepada anda. Anda perlu keluar dan dapatkan maklum balas. Dari situ anda tahu mana yang boleh berhasil, apa yang pelanggan anda mahu dan sebabnya.

"SESEORANG YANG TAKUT UNTUK MEMBUAT KESILAPAN TIDAK
AKAN MENEMUI SESUATU YANG MENAKJUBKAN!"

Pastinya ada sesuatu yang hebat berlaku dalam hidup kita daripada kesilapan yang kita pernah buat. Tiada yang sempurna dalam hidup ini. Anda perlu membuat kesilapan dan teruskan kehidupan. Tiada seorang pun yang berjaya pada hari ini yang tidak pernah buat kesilapan.

Kekalahan adalah salah satu dari strategi kemenangan. Kekalahan adalah sesuatu yang ditakuti oleh orang yang gagal. Untuk menang, anda perlu kalah sekali sekala. Ianya menjadi pengalaman dan memberikan anda satu motivasi. Ia menunjukkan mana yang kurang dan bagaimana untuk anda perbaikinya. Pasukan yang menang sesuatu pertandingan tidak menang semua perlawanan.

Dalam bisnes anda akan selalu diuji, anda anda perlu tangkas dan berani menghadapi cabaran.

Ingat, orang yang berhenti tidak akan maju ke depan.

#dipetik dari email seorang sahabat yg spamming inbox saya..

Types of Mutual Funds

There are thousands of mutual funds or unit trusts in the market. They are not the same. Though the funds are sold by the same company. There are funds designated to outperform the index, mimicking the index, sectoral funds and others. Thus, it is very important for you to know your investment objective and also your risk profile.

Investing in mutual fund is not only about making 50% return per year. It is about matching your investment objective and risk profile, thus if you can gain even 5%-7% and it is consistent gain annually for 30 years, it is a good investment if you are a low risk investor.

But if you’re searching for 50% return in 2007 but a year later the fund only gives you -10%, and you’re not that savvy investor, I don’t think you have made a correct decision. To make the situation worse, the fund is for your retirement!

Here is a general types of mutual funds that are available in the market:

1. Equity Funds

The most common funds that will become the hottest in town when they are making 75% return in a year! Basically this type of fund will invest in stocks & equities but among the equity funds itself, they’re also differences. The risks are not the same. There are equity fund which invest for:

- Company dividends
- Company potential growth
- Small Capital company
- Value Investing
- Big capital company
- and many more.

2. Bond Funds

Invest largely in the bond market, particularly in the bond issued by the government and big corporations. Bond funds generally known as a conservative type of investment without the potential for growth and high returns.

3. Index Funds

Index funds are equity funds that allocate their assets in any index components, like the Kuala Lumpur Composite Index, Dow Jones, S&P and others. The strategy behind the funds is very simple, follow the particular index. Your investment won’t outperform the index nor do worse than the index.

4. Hybrid Funds

Balance. That is the keyword. The fund manager will allocate some amount of fund in the bond market for safety reason and invest the other parts in the equity. Among the strategies of hybrid funds is to put the money in the equity in the bull market and retreat to bond market when the market in bear situations.

5. Money Market Funds

Money market funds invest in money market securities which are sold by financial companies in a variety of denominations and by the government. The investment in money market securities is usually on for short periods. In other words, money market funds is like your savings account in the bank but it give you better return, but remember, money market funds is not insured like your savings account.

6. Industry / Sectoral Funds

The fund invest specifically in certain industry such as industries sector, banking, technology, consumer, energy, and others. If you’re working in one of the industries this fund may suitable for you.

7. Syariah Funds

In Malaysia, Syariah funds also have different types. Basically syariah funds can be categorized into funds which are invest largely in equity, bonds, index that has been approved as a halal investment.

Happy investing.


thanks to pakdi for this article