I have been trying to follow the events in Venezuela and I just read that they are experiencing 4000% inflation. Now I am not entirely sure how economists calculate that but is it as simple as it taking $4000 to equal $1? The story also reported that they expect the inflation rate to hit 5 digits sometime this year.
I have been trying to follow the events in Venezuela and I just read that they are experiencing 4000% inflation. Now I am not entirely sure how economists calculate that but is it as simple as it taking $4000 to equal $1? The story also reported that they expect the inflation rate to hit 5 digits sometime this year.
I think they mean $1 would become $40, or maybe more accurately $40 would now be needed to buy what $1 would last year
The percentage is relatively useless without a time-frame
https://en.wikipedia.org/wiki/Hyperinflation#Units_of_inflation
When inflation rates reach those numbers it ceases to have much meaning. Think Confederate money in 1865, German money in the early 1920's,?ÿ Zimbabwean money in 2008. The "money" just ceases to have any value at all. Nobody will take it in exchange for goods and services. I'm sure that the American dollar, or perhaps the Euro,?ÿ is the true medium of exchange now.?ÿ
4000 percent increase is a 40-fold increase. ?ÿ100 percent increase is a 2-fold increase. ?ÿConfusing because the end result is 40 times what it is now but only an increase of 39 times. ?ÿIt takes 40 dollars to buy what should cost the one dollar you already were prepared to spend.
It can get tricky. The reported Consumer Price Index numbers in the US are monthly rates, but the BLS also reports the 12-month change. For December, 2017, the month's change was 0.1% and the 12-month change since December, 2016 was 2.1%. Note that annualizing the December number by multiplying it by 12 gives an annual rate of 1.2%, so the inflation rate slowed somewhat in December. The press release is here:?ÿ https://www.bls.gov/news.release/cpi.nr0.htm
Going off on a slight tangent, if you look at current interest rates on US bank CDs, they don't currently cover the rate of inflation.?ÿ
One Venezuelan bank,?ÿ https://venezuela.deposits.org/savings-accounts/ is paying 16% on savings accounts. If the 40% is an annual rate, the savings accounts will lose 24% of their value over the course of a year. That's much worse than the US, but the difference in Venezuelan and US interest rates points out the effects of inflation on interest rates.?ÿ
When inflation turns ugly, though, there's just no keeping up.
?ÿ
It can get tricky. ..., the month's change was 0.1% ... annualizing the December number by multiplying it by 12 gives an annual rate of 1.2%
For small percentages one can get away with just multiplying, but for larger percentages or large number of periods you have to use the compounding formulas.
1.001 ^ 12 =?ÿ 1.01207 so?ÿ using 0.1% x 12 isn't far off.
But for 5%/period
1.05^12 = 1.796 or nearly 80% instead of 5% x 12 = 60 %
1.10^12 = 3.14 or 314% rather than 10% x 12 = 120%
As to the ratio versus increase, I'm always confused and annoyed with those in-between cases where the context doesn't clearly distinguish between X percent of what it used to be [100 * now/then] versus X percent increase from what it used to be [100 *(n0w-then)/then].
Right you are, Bill. A credit card that charges 18 percent interest uses .18/12, or 0.015 as its monthly interest factor. But when you raise 1.015 to the 12th power you get 1.1956, which is a 19.56 percent annual rate.
When I studied for actuarial exams in the late sixties, we called the 18 percent the "nominal rate" and the 19.56 percent the "effective annual rate." Nowadays, the 19.56 percent is the APR. I don't know what the 18 percent is called.
When rates get as high as your 5 percent per month example, only the APR matters. When they get as high as Venezuela's inflation rate, the math no longer matters at all, I think.
Thanks. And some of you are throwing around 40% HOWEVER the recent news stories I have been reading described the inflation down there as being 4000% with the expectation that it would be 10000% sometime this year. Those numbers are frankly frightening to try and grasp hence the reason for my questions.
Yep, 4000%. It will take $41 dollars a year from now to buy what $1 will buy today. Or $1 today will be worth $0.02439 a year from now. Hard to keep up in that environment.
The intricacies of economics is a puzzling thing.
So.....I believe I was 8 years old when Nixon took us off he gold standard and once again I have read many many reports comparing where we are now versus then.
The gold standard gave us a measureable benchmark to gauge the relative value of the dollar and since then the dollar has been dropping in real buying power and inflation has always been outpacing incomes. Anyway I have read that the buying power of todays dollar is about $0.04.
I realize I am asking about a 45 year trend but it seems the same thing has happened here, just slower. I guess it is arguable but it is said that our standard of living has gone up but our buying power has gone down. As a nation, our families have less disposable income now than back in 1973.
?ÿ
The gold standard is nothing special.?ÿ Someone has to set the value of an ounce of gold.?ÿ Even under the gold standard governments tinkered with the money supply.?ÿ?ÿ
I need to make a correction. APR is the interest rate without compounding and APY is the interest rate with compounding. If the APR is 18%, then the APY is 19.56%. I swear I remember the dawn of the term APR and it meaning with compounding, but that's not what it means now, and my memory fails me more often now than in the past.
Several websites explain the difference; this one is pretty good:?ÿ?ÿ https://www.investopedia.com/personal-finance/apr-apy-bank-hopes-cant-tell-difference/
Sorry for the misinformation.
?ÿ
