BUSINESS (CPI, Inflation, TVM, Credit Ratings) Flashcards
what had driven inflation?
-COVID
-oil prices
-Ukraine war: Russia not exporting much oil (no one wants to buy it from them)
-Sada araba: put back production
*when energy goes up =forces everything else to go up (ex. need to transport things)
Bank of Canada
-sets the ‘overnight rate’ = everyone bases their interest rates off it
-supposed to operate at arms length from government
-when economy too high=raise up interest rates=people realize they don’t have money/can’t afford it=cools down supply and demand
-if interest rates are too high for too long=recession
inflation
-the increase in cost of living (COL) as the prices of goods and services rise
consumer price index (CPI)
-stats Canada is responsible for measuing CPI
-generally a measure of the rate of inflation
-calculated by pricing a standardized ‘baset’ of goods and services (ex. groceries, electricity, gas, power, restaurants, etc.)
-quoted as a number or a year-to-year percentage change (*most commonly percent change)
basket of items
-similar across countries
-we consume more gasoline than milk in a year, so gas has a higher rating
-Stats Canada send people into retail outlets to obtain prices on a monthly basis
same basket of items each year
-stats Canada can measure whether the cost of all goods and services in the basket is going up (inflation) or down (deflation)
CPI and inflation
-NOT synonymous
-CPI: change in price of the basket from one period to the next
-Inflation: an increase in the basket over time
-Deflation: a decrease in CPI
common CPI (often referred to as CPI)
-measure of all goods and services in the basket
core CPI
-measure of all goods and services minus energy and food prices
why remove energy and food?
-the most volatile items in the basket
-if ever a weather crisis, the food prices may spike
-oil can also fluctuate dramatically (results in changes in gasoline prices)
trimmed CPI
-CPI-trim excludes 20% of the weighted monthly price variations at both the bottom and top of the distribution of price changes
*always removes 40% of the total CPI basket
median CPI
-similar to trimmed
-eliminates outliers on top and bottom of CPI distribution
target range inflation
-2-3%
-where we tend to be
-bank of Canada has done a really good job until COVID came (11 increases in 18months)
nominal returns
-what an investment (ex. savings account, stock divends) generates without adjusting for inflation
-almost always higher than real (except during the rare times of deflation)
real returns
-what your investment earned after adjusting for inflation
-represents purchasing power
purchasing power
-amount of goods and services that can be purchased with a unit of currency
Ex. if inflation goes up, purchasing power goes down b/c amount of currency is held constant
increasing goods/services
-annual increases in vet products and services are essential
-what you buy increases, the same increases should be passed down to the owner and producers
-also need to increase everyone’s salary
think about real returns when negotiating/discussing annual salary
-if offered an increase, it’s important to look at what the CPI did in your area
time value of money (TVM)
-relates to concept that the money available in the present is worth more (greater purchasing power) than the exact same amount in the future
present value of money (PV)
-earlier money on a time line
future value of money (FV)
-later money on a time line
interest rate/”exchange rate”
-difference between the earlier and later money
investment/finance perspective (TVM)
-always better to receive money now versus in the future
-inflation erodes purchasing power but if you can invest it in something that earns more money than the rate of inflation, your money will be worth more in real terms in the future (inflation adjusted)
TVM key points
-better to have money in the present vs. the future
-simple or compound interest
-can be calculated if you know the initial investment, the interest rate, time frame and number of time periods
-compounding periods is an important factor for determining the future value of your present investment
simple interest
-based on principle amount of loan or deposit
compound interest
-based on principle amount + the interest that accumulates (beware credit card debt)
rule of 72
-simple trick to determining how long it takes for an investment or revenue to double based on a known interest rate
-divide the number 72 by the rate
-if you shoot for 7%/annum return, then your investments will double every 10 years
