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The Inflation Beat
Q & A
Inflation Forecasting Methodologies

What is Inflation and Where Does It Come From?
By Jason Tillberg
In any society, there needs to be a medium of exchange when we either want to buy or sell something.

In America today, the US Dollar  is our medium of exchange.  We value just about every product and service as well as asset values in dollars.  

To understand inflation, we first need to understand money.   There are books written about the subject of money, but I want to focus on the US money system, our money, our dollars and the inflation that comes with it.
In these United States, we have what is known as The Federal Reserve.  It's a system of 12 banks scattered around the country that act as a gate keeper to the creation of money and the soundness of our money.   When I say creation of money, I mean debts.  Banks are the main issuers of debt.
Take a look at any one of your bills and you will find words  on it that say, "This Note Is Legal Tender For All Debts, Public and Private."

What that means is that basically, all money is debt.  If you have a $100 bill, you have someone else's debt.

Money is Debt. (Period)

It's a bit depressing to think that all our money is debt and we'll never be able to pay it all off, but it is.

However, it's also a good thing.  It's a good thing because it acts as a check and balance on the creation of money.  

That our money is debt means that you only want to borrow what you believe you can pay back OR at least pay the interest on.   Same goes for the lender as they only want to lend what they believe they will get back.

Below is a chart showing the overall debt  in the US as of the end of 2018.  This includes consumer debt like credit cards, mortgages, student loans, car loans for example.  It also includes Corporate debt as well as  Government debt like the Federal debt, which is now over $20 trillion.  All the debts outstanding make up this aggregate figure.  At the end of 2018, in the aggregate, we were up to $72.1 Trillion of debt outstanding.   ​ 
It is this debt growth that "pays for" the inflation.

It is this aggregate debt growth that is so important as to how it relates to inflation.

To support a growing economy of a nation, where the population is growing, you need more and more money to supply the nation with her money needs.  That's perfectly fine and normal and healthy.

So we are going to start with this chart that shows the year over year percent change in the rate of debt growth and adjust it for population growth.  This will give us a debt growth rate Per Capita.

This is the beginning of understanding what inflation is and where it comes from.
It is the money growth, perhaps sometimes referred to as the "monetary growth," that is the main factor in where inflation comes from.

So now, because all this new debt gets created and all this new money is issued into the economy, prices are most likley to rise.  Inflation, thus, is generally understood as the increase in prices.  It is the result of the increase in money into the economy, which comes from new debt.

The Federal Reserve Bank has a duel mandate, stabele prices and full employment.  They also have an inflation target of 2% per year.  Thus, there are efforts to issue enough debt year after year to reach a 2% inflation rate.

At the same time, great efforts are made to reduce costs and improve our living standards and this acts as a buffer to the implications of money growth alone.

As per the chart above, it shows the year over year percent change in the DEBT outstanding or MONEY issued.

In the next chart below, I will show the same chart as above, but include the rate of inflation too.
The red line is the annual rate of inflation while the blue line is the rate of credit growth per capita.  

This is the starting point where we must begin in order to understand how the end result in inflation came be be.  It's also the best starting point to begin to forecast and predict where inflation is headed.

How my theory and methodology is to be understood is simply that there are Inflationary Forece and Deflationary Forces that impact prices.

These factors include but are not limited to:

- Productivity

- Strenght of US Dollar

- Importation of Goods and Services at lower prices

- Commodity prices

These factors have the potential to be an inflationary force or a deflationary force to varying degrees and the prudent manager or investor will want to keep there eyes on these trends or visit my site monthly to monitor my forecasting array.
I hope this sheds light on the concept of inflation and just where it comes from and what contributes to what the rate will be.

Investors should be very interested in the rate of inflation as it is a benchmark for as to what rate of return they will demand on their money for investment.
Business managers will also benefit from having a better understanding of inflation and future costs to improve their budget forecasts.

Getting a handle on inflation is a MUST for any investor looking to improve their chances of beating it!
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