MicKensey Quarterly has detected that the country's low interest rate and high government spending has played a huge role in stabilizing economies during the global recession. However, they now have companies, investors and policymakers on the lookout for inflation to come roaring back.
http://www.forbes.com/2010/02/04/inflation-danger-risk-leadership-governance-mckinsey.html?boxes=Homepagechannels
At first glance the effects of inflation on a company's ability to create value might seem negligible. After all, as long as managers can pass increased costs on to the customer, they can keep inflation from eroding shareholder value. Most managers believe that to achieve this goal, they need only ensure that earnings grow at the rate of inflation.
Yet a closer analysis reveals that to fend off inflation's value-destroying effects, earnings must grow much faster than inflation.For example in the mid 1970s to 1980s, U.S. companies managed to increase their earnings per share at a rate roughly equal to inflation around 10%. But according to their analysis, they would actually have to increase their earnings growth by around 20%.
We learned that the two most important macro variables are unemployment and inflation rate. This article talks about how inflation affects shareholder values and not customers. As I read this article I was confused because we learned that unemployment was the inverse of inflation, which means that people who are heavily impacted by high unemployment rates are not worried about inflation. Here it says that in order to prevent inflation, earnings must exceed inflation. This article was a little tricky to understand and connect to what I know about inflation and employment. I need some help guys.
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It makes sense to me that in order to prevent or ward off the effects of inflation, earnings must exceed inflation. This is because if they were the same or less than inflation, you would actually be earning less money because inflation is just a different value for the same money. So, if money were to lose value, but you wree stilll being payed the same number of dollars, you would essentially be earning less. That is why, salary must increase above the rate of inflation for people not to be affected.
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I think Cierra has a good understanding of the article and I like the explanation. Another concept we learned at the beginning of the quarter is 9th principle of economics: Prices rise when the government prints too much money. The more money that is created, the lesser in value it is compared to the rising prices. When inflation takes place, the current salary you are making is technically worth less. When people are unemployed there is less money being moved around and printed, thus I am assuming inflation is low based on the inverse relationship. When there is more employment there will be more money being circulated and in the hands of the consumers, which will cause inflation to grow based on the inverse relationship. (A, T)
ReplyDeleteIt makes sense to say that in order to prevent the destroying effects of inflation, earning must grow at a faster rate than inflation itself. If I am correct then inflation is what’s caused when too much money is printed making the dollar worth less, then people need to make more money in order to purchase things that are worth more. With inflation and prices going up, you’re basically earning the same amount of money but its simply worth less meaning people are being cheat on. E.A
ReplyDeletei agree with cierra on her explanation about inflation. But also if salary is not raised during times of inflation people get pinched and can't afford common items they would typically buy.
ReplyDeleteFirst I am confused because the same reason with Lashawn:unemployment was the inverse of inflation.But after I read what Cierra wrote : the inflation is just a different value for the same money. That make sense to me now. When the money is less value, even though people paid the same price, but the things you earned is less value too...
ReplyDeleteI agree with Cierra’s point of view about the topic of inflation. Jared brings up a a valid point. If salaries are not taken into consideration, every day items, even groceries will become out of a normal buying range.
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