Do you really understand what inflation is? Without exaggeration, as a brother, I earn over ten million annually based on inflation indicators in every trading cycle! Everyone knows that inflation data is an important indicator for the Federal Reserve to raise/lower interest rates, but it only affects the liquidity of the stock market/cryptocurrency circle we invest in. Simply put, the definition of inflation is: there is more money in the market, things are becoming more expensive, and money is becoming less and less valuable. That is to say, our money has "shrunk" and our purchasing power has decreased. Why did the money increase? Or, why is money becoming less and less valuable? This starts with the reasons for currency depreciation. 01. Reasons for inflation The first reason is that there are too many money prints and the money supply exceeds the standard Imagine you are on a small island with only 10 golden apples, and everyone only has 100 yuan in total, with each apple costing 10 yuan. Suddenly, the "central bank" on the island decided to print another 100 yuan, so everyone had 200 yuan in their hands, but there were still 10 apples. What was the result? Apple prices have doubled, each at 20 yuan! With more money, prices naturally rise, which is a typical inflation caused by an excess of money supply. In the real world, after the 2008 financial crisis, the Federal Reserve crazily printed money to "rescue the market", which led to the proliferation of US dollars in the market and ultimately pushed up the calculated global inflation rate. In recent years, in response to the impact of the pandemic, governments around the world have launched large-scale currency injections, resulting in a new round of global inflation trends. The second reason is that there is a shortage of things, leading to an imbalance between supply and demand What if the money in the market hasn't increased, but the goods have decreased? The answer is the same - the impact of rising prices still exists! For example, after the Russia-Ukraine conflict in 2022, Russia's natural gas supply will decrease, and the heating costs in Europe will rise sharply, leading to fluctuations in energy prices, and oil prices, natural gas, and electricity bills will all go crazy. In addition, during the pandemic, the global supply chain was under tremendous pressure, and many goods could not be shipped out, causing prices to naturally rise. The third reason is that the cost has increased, with wages, materials, and logistics all rising Would you be happy if your company offered you a salary increase? Don't rush to be happy for now. If a company raises the wages of all employees, the operating costs of the company will increase, and it will have to raise the prices of goods and services, transferring the costs to consumers. So, wage increases have become one of the triggers for price increases, which is the relationship between wage level adjustments and inflation. Similarly, if the raw materials produced by enterprises become expensive, such as chips, oil, grain, etc., their price increases will also be transmitted to consumer goods, forcing everyone to pay more. 02. Case analysis: Federal Reserve raises interest rates When it comes to inflation, we have to mention the Federal Reserve. In 2021, the inflation rate in the United States soared to a new high in 40 years, with the CPI index (Consumer Price Index) breaking through 9% at one point. In order to curb inflation, the Federal Reserve had to initiate its interest rate hike policy. How can interest rate hikes curb inflation? There are two core logics: After the interest rate hike, loans become more expensive, borrowing costs increase, and businesses and individuals are unwilling to borrow money for investment or consumption; When there is less money in the market and demand decreases, prices naturally stabilize. But the problem is that the impact of the interest rate hike policy is not only to reduce inflation, it may also bring the risk of economic recession. In 2023, Silicon Valley Bank (SVB) went bankrupt due to the Federal Reserve's interest rate hike, which led to an increase in bond yields and a devaluation of the bonds held by the bank, ultimately resulting in a collapse. This indicates that once interest rates are raised too aggressively, the financial system cannot withstand it. The game between inflation and interest rate hikes has affected not only the United States, but also the economies of the world. 03. Classification of Inflation According to the severity of inflation, it can be classified into three types: mild or crawling inflation, galloping or galloping inflation, and vicious or runaway inflation. 1. Mild or creeping inflation This is a type of inflation that keeps the inflation rate at around 2% -3% and remains relatively stable. Some economists believe that if the annual price increase rate is below 2.5%, it cannot be considered as inflation. When the price increase rate reaches 2.5%, it is called unconscious inflation. Some economists believe that moderate inflation can stimulate economic growth during the process of economic development. Because raising prices can give manufacturers a little more profit to stimulate their investment enthusiasm. Meanwhile, moderate inflation will not cause too much social unrest. Moderate inflation, which aims to control price increases within 1% -2% or at most 5%, can stimulate economic development like lubricating oil, which is known as the "lubricating oil policy". 2. Rapid or galloping inflation Rapid or galloping inflation is also known as galloping inflation or rapid inflation. It is an unstable, rapidly worsening, and accelerating inflation. When this type of inflation occurs, the inflation rate is relatively high (usually reaching double digits or higher), so when this type of inflation occurs, people's confidence in the currency is shaken and the economy and society are in turmoil, making it a more dangerous form of inflation. 3. Malignant or uncontrolled inflation Malignant or uncontrolled inflation is also known as extreme inflation or excessive inflation. Once this kind of inflation occurs, the inflation rate is very high (usually above three digits) and completely out of control, resulting in a sustained rapid rise in social prices, a significant devaluation of the currency, and a complete loss of confidence in the currency. At this time, the entire social and financial system is in chaos, and normal socio-economic relations are disrupted, which can ultimately lead to social collapse and government collapse. This kind of inflation is rare in the history of economic development and usually occurs after wars or social unrest. The currently recognized malignant inflation has only occurred three times worldwide. The first occurrence occurred in Germany in 1923, shortly after the end of World War I. Prices in Germany rose by 2500% within a month, and the value of one mark dropped to only one trillion times its pre war value. At the height of the crisis, workers' wages were paid twice a day, and by evening, the price of a loaf of bread was equal to the value of a house in the morning. The second time occurred in Hungary in 1946. After the end of World War II, the value of a Hungarian bun was only equivalent to one eighth to the 28th by one tenth to the 27th before the war. The third time occurred in China, from June 1937 to May 1949, the issuance of counterfeit fiat currency increased by 144.5 billion times, and the price index rose by 3680.7 billion times during the same period. For example, in February 1948, the market price of each dan of rice in the Chinese market was 3 million yuan in French currency. Just four months later, in June, the market price of each dan of rice became 10 million yuan in French currency. In other words, the rice price in June was more than three times that of February, and the situation was accelerating. It can be imagined how severe this vicious inflation was at that time. Wages and sales require bundles of money According to the causes of inflation, it can be classified into four types: hidden inflation, demand driven inflation, cost push inflation, and structural inflation. 1. Hidden inflation Hidden inflation is also known as suppressed inflation. This type of inflation refers to the pressure of inflation or potential price increase crisis in the social economy, but due to the strict price control policies implemented by the government, inflation has not truly occurred. However, once the government lifts or relaxes price control measures, inflation will occur in the economy and society, so this inflation is not non-existent, but a hidden inflation. 2. Demand pull inflation Demand driven inflation refers to the phenomenon of a general increase in the average price of goods caused by the growth of total demand, such as the fact that air and train tickets during holidays are more expensive than usual. 3. Cost push inflation Cost push inflation refers to the phenomenon of a general increase in the average price of goods and services caused by producers actively raising prices. For example, when the price of chicken increases, the prices of chicken burgers and chicken sandwiches will also rise accordingly; When oil prices rise, the world will feel cost push inflationary pressure. 4. Structural inflation Structural inflation refers to the phenomenon where prices rise due to excessive demand for certain products in certain sectors while overall demand is not high, resulting in price increases for some products. During inflation, demand, cost, and structure all play a role simultaneously. Overall, the seven types of inflation can be summarized into the following four categories: Benign: Mild or creeping inflation, demand driven inflation Be cautious: hidden inflation, structural inflation Dangerous: Cost push inflation, galloping or galloping inflation Deadly: malignant or uncontrollable inflation 04. The impact of inflation The cost of living is rising, and ordinary people are becoming increasingly poor Inflation can lead to an increase in the cost of living, with rent, food, transportation, and healthcare all becoming more expensive, but wages may not necessarily keep up. The depreciation of savings for ordinary salaried workers is making life increasingly difficult. Investment shrinks, saving money becomes increasingly unprofitable Many people think that keeping money in the bank is safe, but the reality is that if the inflation rate is 5% but your bank deposit interest rate is only 2%, your money is actually "shrinking". That's also why many people prefer to invest in real estate, stocks, and gold rather than lying their money in the bank. Stagflation crisis: economic stagnation+inflation explosion The most terrifying thing is' stagflation '- economic growth stagnates, but inflation remains high. In the 1970s, the United States experienced a stagflation crisis where the economy did not grow but the unemployment rate soared, leading to social unrest. Pay attention to CPI index and PPI index, make decisions in advance The CPI (Consumer Price Index) and PPI (Producer Price Index) are important indicators for measuring inflation. The rapid increase in CPI indicates that prices are soaring; The rapid increase in PPI indicates that production costs are rising and prices may continue to rise in the future. Learning to pay attention to these data can help brothers make economic decisions in advance.