Financial Elasticity – What Makes Money Stretch And Contract?

Rapid increases in the quantity of money or in the overall money supply have occurred in many different societies throughout history, changing with different forms of money used.[1] [2] As 2022 unfolds, the world of finance has become increasingly more difficult to navigate. The last few months have been historical, especially when it comes to Financial Elasticity. Let’s look at what makes money stretch and contract.

Inflation refers to a rise in the general price level in goods and services in an economy.[3] When the general price level rises, each unit of currency buys fewer goods & services. It can correspond to a reduction in the purchasing power of money.[4] [5]

Definitions Within Concepts of Inflation:

• Disinflation—a decrease in the rate of inflation.[7]
• Hyperinflation—an out-of-control inflationary spiral.[8]
• Stagflation—a combination of inflation, slow economic growth and high unemployment.[9]
• Reflation—an attempt to raise the general level of prices to counteract deflationary pressures.[10]
• Asset Price Inflation—a general rise in the prices of financial assets without a corresponding increase in the prices of goods or services.[11]
• Agflation—an advanced increase in the price for food and industrial agricultural crops when compared with the general rise in prices.[12]
• Core Inflation represents the long run trend in the price level excluding items frequently subject to volatile prices.[13]

The FED, also known as the Federal Reserve System, is the central banking system of the United States and is in place to maintain the stability of the financial system and manage the nation’s money supply through monetary policy.[14] The FED oversees many aspects and monitors data of the economy through price indexes. Price indices have several potential uses. The common measures of inflation are generally annualized percentage changes in a general price index.[15]

Types Of Price Indices:

• Consumer price index – the price of a weighted average market basket of consumer goods and services purchased by households.[16]
• Producer price index – is a price index that measures the average changes in prices received by domestic producers for their output.[17]
• Wholesale price index – the price of a representative basket of wholesale goods.[18]
• Employment cost index – a quarterly economic series detailing the changes in the costs of labor for businesses in the United States economy.[19]
• Export price index – measures average changes in prices of goods and services that are exported from the U.S.[20]
• Import price index – measures average changes in prices of goods and services that are imported to the U.S.[20]
• GDP deflator – a measure of the level of prices of all new, domestically produced, final goods and services in an economy in a year. GDP stands for Gross Domestic Product.[21]

Financial Elasticity is important. At Ironcrest Capital Management, we strive to make sure that everyone we work with has a strong understanding of their investments. Having a good approach and focus on the most important factors before investing is key. Let us help you make the right decisions. If your current investing approach isn’t working, reach out to us so we can help.