Inflation Adjustment

By: EconomyWatch   Date: 14 October 2010

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It is a well known fact, that inflation causes all the factors of the economy to change. Some of the important factors to get affected include investment, stocks, mortgage, unemployment, interest rates, exchange rates. Investments are made so that an investor gets more, from the amount that has been invested. People invest in bonds, stocks and adopt various other investment tools to channelize their money. Due to inflation, the value of money gets reduced over time. Consequently, the purchasing power of the individual also gets affected. Many investments are inflation protected and the process of rendering protection is referred to as inflation adjustment. Inflation adjustment protects the value of money invested.

Tools for measuring rate of inflation:

The important tools for measuring inflation are CPI or the consumer price index and the GDP or the gross domestic product.

Inflation adjustment can be best understood by the following example:

For instance, a bond is bought for USD500 for a period of two years. During this period, inflation sets in and the price of the bond becomes USD600. It means, the bond, which was bought for USD500 can now be bought for USD600. This indicates that the value of money has declined. So, the profit, which the investor was entitled to avail after the maturity of the bond becomes insignificant. In order to protect the value of money from going down, inflation adjustment is relied on. The federal government in United States of America has implemented several types of inflation protected securities for the same purpose. The Treasury department of United States of America offer many such securities to counteract the effects of inflation.

There can be inflation adjustment for many types of investments. Inflation adjustment can be for adjustments in oil prices, wages, price of gas, return (real return), annuity, bonds.

Inflation Adjustment

 


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