13. What is Inflation?

What is Inflation

How and why does the government inflate the currency

WHY?

• A moderate amount of inflation protects the country from deep recessions / depressions
• It serves as an indirect form of taxation
  HOW?
• The FED increases the money supply
• Reserve ratio. 1/Reserve ratio = multiplier to the base money

How does inflation affect bonds and stocks

Bond

Actual Bond Yield = Bond Value - Inflation Rate
TIPS = Treasury Inflation - Protected Securities

Stocks

As cost of materials increases, the sales price would also increase. Therefore, stocks with no debt are generally unaffected.
Caveat: If inflation moves the price point of a product outside of the market's desire, inflation will impact a stocks performance.