What is Inflation and the Real Rate of Return?

If you have money, you have to understand inflation: how it will affect you and how to protect your self from it. Inflation simply means price increase: price "inflate". But the better word to define inflation is, erosion,because money is a perishable item. Milk sours. Fruit rots. Money erodes proportional to the inflation rate. For example, if you hold today $ 1000 to buy $ 1000 of goods and prices inflate 5% this year, you'll need $1050 to buy those goods a year from today (5% of your money will have eroded). If you don't pay attention to inflation, you'll never notice how much of your money disappears every year. Inflation rate is commonly measured by the Consumer Price Index (CPI), which measures the changes in your day-today expenses. The CPI is released in the middle of every month and published in major papers. Where to find inflation rate? What cause inflation? It isn't easy to determine, but here are two possible causes: Too much money in circulation, indicated by either dropping unemployment figures (too many people with spending money) or increased government printing of money (money is easy to get). Not enough products being made to meet demand, indicate by either factories producing at near capacity or increased "housing starts"(too much demand for copper, wood, and other home building products). With increased demand, prices rise, and the same amount of money buy less. The Real Rate of Return It's important to know how much your money is earning. But its also important to know how much it is losing, for you to know how much your money will end up. The interest you're earning from an investment less the interest you're losing to inflation and what remains is you're real earnings. For example, your investment's rate of return is 15%, inflation rate is 5%, therefore you're real earnings is 10% after the effect of inflation.

Mark Hugh Neri

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