INFLATION
INFLATION IN THE U.S. <ul><li>INFLATION </li></ul><ul><ul><li>DEFINITION:  the percentage change in a specific cost-of-liv...
INFLATION IN THE U.S. <ul><li>INFLATION </li></ul><ul><ul><li>cost-of-living index </li></ul></ul><ul><ul><ul><li>the “ove...
INFLATION IN THE U.S. <ul><li>PRICE INDICES </li></ul><ul><ul><li>measure changes in prices relative to a fixed period in ...
INFLATION IN THE U.S. <ul><li>PRICE INDICES </li></ul><ul><ul><li>the Consumer Price Index (CPI) is calculated by the U.S....
INFLATION IN THE U.S. <ul><li>NOMINAL AND REAL RETURNS </li></ul><ul><ul><li>Fisher Model of Real Returns stated that real...
INFLATION IN THE U.S. <ul><li>NOMINAL AND REAL RETURNS </li></ul><ul><ul><li>price change may impact an asset’s nominal re...
INFLATION IN THE U.S. <ul><li>NOMINAL AND REAL RETURNS </li></ul><ul><ul><li>adjustments to the nominal return are needed ...
INFLATION IN THE U.S. <ul><li>FORMULA FOR CALCULATING  REAL RETURNS </li></ul><ul><ul><li>where C 0  = CPI at the beginnin...
INFLATION IN THE U.S. <ul><li>NOMINAL AND REAL RETURNS </li></ul><ul><ul><li>a quick calculation of the real return </li><...
INFLATION IN THE U.S. <ul><li>THE EFFECT OF INVESTOR EXPECTATIONS </li></ul><ul><ul><li>investors’ attitudes toward inflat...
INFLATION IN THE U.S. <ul><ul><li>THE EFFECT OF INVESTOR EXPECTATIONS  </li></ul></ul><ul><ul><li>Looking to the future </...
STOCK RETURNS AND INFLATION <ul><li>OVER LONG PERIODS OF TIME </li></ul><ul><ul><li>common stocks generated large, positiv...
STOCK RETURNS AND INFLATION <ul><li>OVER LONG PERIODS OF TIME </li></ul><ul><ul><li>T-bills produced much lower, positive ...
STOCK RETURNS AND INFLATION <ul><li>OVER SHORT PERIODS OF TIME </li></ul><ul><ul><li>stock returns are not positively rela...
STOCK RETURNS AND INFLATION <ul><li>OVER SHORT PERIODS OF TIME </li></ul><ul><ul><li>stock returns are positively related ...
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Inflation

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Inflation

  1. 1. INFLATION
  2. 2. INFLATION IN THE U.S. <ul><li>INFLATION </li></ul><ul><ul><li>DEFINITION: the percentage change in a specific cost-of-living index at various points in time. </li></ul></ul>
  3. 3. INFLATION IN THE U.S. <ul><li>INFLATION </li></ul><ul><ul><li>cost-of-living index </li></ul></ul><ul><ul><ul><li>the “overall” price level computed for a “basket of goods” </li></ul></ul></ul>
  4. 4. INFLATION IN THE U.S. <ul><li>PRICE INDICES </li></ul><ul><ul><li>measure changes in prices relative to a fixed period in time usually called the base period </li></ul></ul>
  5. 5. INFLATION IN THE U.S. <ul><li>PRICE INDICES </li></ul><ul><ul><li>the Consumer Price Index (CPI) is calculated by the U.S. Bureau of Labor Statistics in the Department of Labor </li></ul></ul><ul><ul><li>the Bureau uses a “market basket” of over 2000 U.S. consumer goods and services </li></ul></ul>
  6. 6. INFLATION IN THE U.S. <ul><li>NOMINAL AND REAL RETURNS </li></ul><ul><ul><li>Fisher Model of Real Returns stated that real returns are important to investors </li></ul></ul><ul><ul><li>they represented how much purchasing power has changed </li></ul></ul>
  7. 7. INFLATION IN THE U.S. <ul><li>NOMINAL AND REAL RETURNS </li></ul><ul><ul><li>price change may impact an asset’s nominal return </li></ul></ul>
  8. 8. INFLATION IN THE U.S. <ul><li>NOMINAL AND REAL RETURNS </li></ul><ul><ul><li>adjustments to the nominal return are needed to remove the effects on purchasing power of inflation or deflation </li></ul></ul>
  9. 9. INFLATION IN THE U.S. <ul><li>FORMULA FOR CALCULATING REAL RETURNS </li></ul><ul><ul><li>where C 0 = CPI at the beginning of period </li></ul></ul><ul><ul><li> C 1 = CPI at the end of the period </li></ul></ul><ul><ul><li> NR = the time period’s nominal return </li></ul></ul><ul><ul><li> RR =the real return for the period </li></ul></ul>
  10. 10. INFLATION IN THE U.S. <ul><li>NOMINAL AND REAL RETURNS </li></ul><ul><ul><li>a quick calculation of the real return </li></ul></ul><ul><ul><li>NR - IR = RR </li></ul></ul><ul><ul><ul><li>where IR = the rate of inflation for the period </li></ul></ul></ul><ul><ul><ul><li>NR= the nominal return </li></ul></ul></ul><ul><ul><ul><li>RR= the real return </li></ul></ul></ul>
  11. 11. INFLATION IN THE U.S. <ul><li>THE EFFECT OF INVESTOR EXPECTATIONS </li></ul><ul><ul><li>investors’ attitudes toward inflation show they are concerned with real returns </li></ul></ul>
  12. 12. INFLATION IN THE U.S. <ul><ul><li>THE EFFECT OF INVESTOR EXPECTATIONS </li></ul></ul><ul><ul><li>Looking to the future </li></ul></ul><ul><ul><li>E(RR) = E(NR) - E(CCL) </li></ul></ul><ul><ul><li>where </li></ul></ul><ul><ul><ul><li>E(RR) = the expected real return </li></ul></ul></ul><ul><ul><ul><li>E(NR) = the expected nominal return </li></ul></ul></ul><ul><ul><ul><li>E(CCL)= the expected inflation rate </li></ul></ul></ul>
  13. 13. STOCK RETURNS AND INFLATION <ul><li>OVER LONG PERIODS OF TIME </li></ul><ul><ul><li>common stocks generated large, positive real returns </li></ul></ul>
  14. 14. STOCK RETURNS AND INFLATION <ul><li>OVER LONG PERIODS OF TIME </li></ul><ul><ul><li>T-bills produced much lower, positive real returns </li></ul></ul>
  15. 15. STOCK RETURNS AND INFLATION <ul><li>OVER SHORT PERIODS OF TIME </li></ul><ul><ul><li>stock returns are not positively related to either actual or expected rates of inflation </li></ul></ul>
  16. 16. STOCK RETURNS AND INFLATION <ul><li>OVER SHORT PERIODS OF TIME </li></ul><ul><ul><li>stock returns are positively related to both actual and expected rates of inflation </li></ul></ul>

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