What is Inflation?
After inflation your dollar cannot buy ______________ it did before.
Hi, my name is Jon and I'm an independent investor from Kansas City and I'm here today to talk to you about, what is inflation, for About.com.Inflation is defined as an increase in the general level of prices for goods and services. In other words, you have too many dollars chasing too few goods. As inflation rises, every dollar you own buys a smaller percentage of a good or a service. This is referred to as your purchasing power. Which is what your money can buy today but maybe less a year from now.For example if the inflation rate is 3% annually, then a one dollar loaf of bread with cost $1.03 in one year. After inflation your dollar can't buy the same good it could before.For investors, keep in mind that inflation affects your investments by reducing your real rate of return. For example a year ago you invested one thousand dollars in a bond with a interest rate of 8%. Now you are about to collect your $1080 dollars owed to you. However, your 8% is not your real rate of return. Assuming inflation was 3%, your purchasing power has fallen and your real rate of return has fallen. So according to your purchasing power you investment is worth $1050.Thanks for watching and for more information on stocks and investing, be sure to check us out on the web at About.com.
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