Basic Economics and Inflation

[Knux897]

To me, economics are the most complicated thing in the world. I cannot understand them and everytime I read something about them it seems like a jumbled mess. So lately I've been wanting to get a truck but my dad keeps saying that by this time next year, gas prices will be up to around $5 a gallon and that inflation is coming. Now I know he probably heard it from Glen Beck and people have told me "of the economy dosen't work that way" but I don't understand how all this money being printed won't cause infaltion. After all, I see things slowly go up in price, less and less chips in bags, etc.

So could anyone give me the most simple rundown of how economics relevant to inflation work as possible? I understand some things can possibly be complicated, but I REALLY want to get a truck

[Being]

Do you have money to pay for a truck?

[Dreadnaught]

This says a lot of what you need to know: http://www.youtube.com/watch?v=t_LWQQrpSc4



Kinda serious actually.

[Loki]

Tell your dad that if he believes inflation will become really high, he should buy you a truck by credit now, because the amount he'll have to pay back will be far smaller than what he paid in. I.E. Tell him to put his wallet where his mouth is. Just to see how that works, assume there will be inflation of 10% per year. If you buy a car by credit for $10,000 now, that means that those $10k will only be worth $9k a year from now, $8.1k two years from now, etc.

[Knux897]

This says a lot of what you need to know: http://www.youtube.com/watch?v=t_LWQQrpSc4



Kinda serious actually.

It dosen't say anything I don't already know

Tell your dad that if he believes inflation will become really high, he should buy you a truck by credit now, because the amount he'll have to pay back will be far smaller than what he paid in. I.E. Tell him to put his wallet where his mouth is. Just to see how that works, assume there will be inflation of 10% per year. If you buy a car by credit for $10,000 now, that means that those $10k will only be worth $9k a year from now, $8.1k two years from now, etc.

It's not about the price of the truck at all. It's about the truck being a gas guzzler and it being a stupid idea to get one because of ridiculous rises in gas price.

I guess I wasn't clear. Apparently there is supposed to be inflation, but people keep telling me otherwise. My question is, what is the logic behind that(if any at all) and is inflation a guarentee?

[wiggin]

Briefly: US inflation, as measured frequently by some variant of the Consumer Price Index, is currently pretty low. Inflation expectations, as measured by the difference in rates between two types of bonds, are also fairly low and stable for the next ten years (you don't really need to understand the 'how' of this, just accept that this is a measure of what the bond market thinks inflation will be like).

That being said, there is legitimate concern that US macroeconomic and fiscal policy (essentially, how much money the government spends/borrows, and how the Federal Reserve controls the money supply) is too 'loose' - i.e. that it provides too much easy money that will fuel inflation and asset bubbles in the future. I believe these fears are currently unfounded given the large output gap (i.e. there's a lot of cheap money out there but since we have a lot of excess production capacity in our economy right now, that can easily pick up the slack before inflation becomes a big problem), but the real fear is that the Fed will not 'tighten' the money supply soon enough once economic growth picks up, leading to higher than usual inflation. That being said, neither me nor the naysayers really know; there are no guarantees with inflation.

Nevertheless, this has little to do with your particular question. First, oil prices are only a part of inflation (and actually, most measures of the so-called 'core' CPI specifically exclude oil prices from the measure), and often move independently of broader price trends due to a variety of factors such as political instability in the Middle East, shifting oil demand, etc. The long term price trend of oil is probably upwards - likely there is fairly limited supply of cheap oil (there's a lot more oil in other less accessible areas, but it costs more to extract), and demand in emerging markets is heating up, particularly in China and India. Whether this long term behavior would significantly affect you during the lifespan of your truck, though, is really questionable.

The problem is that you're asking a question that is worth a lot of money to a lot of people - some of the most successful airlines today, for example, have made fantastic sums of money by betting on the direction of oil prices. Forecasting oil prices is very difficult and can easily lose you a lot of money, though, so I wouldn't trust anyone who tells you they 'know' which way oil prices will go in the next few years. Who knows? Maybe a war will break out in the Middle East. Maybe China will experience a slowdown in growth. Maybe US consumption will decline with higher fuel efficiency standards and a shift towards hybrid and electric vehicles. Maybe estimated oil reserves will unexpectedly drop - or increase. Maybe the US will increase the gasoline tax. It's complicated.

In that context, I guess you have to ask yourself some basic questions: how much money are you willing to spend on gas a year? Given typical fuel economy for the truck and your expected annual mileage, what price of gasoline would that translate to? If it's anything under $4-5/gallon, it's likely you'll want to buy a more efficient vehicle or opt to drive less.

Another thing to consider is the 'opportunity cost' involved here. That essentially is the cost of what you'd do with your money if you didn't buy a truck. Would you save it? Invest it? Pay down debt? Buy something else? If the return you'd get from your other activity is more than the use and pleasure you'd get out of a truck (factoring in your maximum expected fuel prices), then it's probably a good idea to forgo the truck altogether.

Lastly, there is the cost of 'externalities' - that means something that you don't pay for directly, but affects everyone. If you consume a lot of gasoline, you will probably be contributing to the US trade deficit, to US dependence on iffy foreign countries for oil, and to pollution. You don't pay directly for any of these things, but they are all generally bad for everyone. This doesn't mean you should or shouldn't buy a vehicle that uses more fuel - plenty of people need less efficient vehicles for one reason or another. It just is another factor you might want to consider in your deliberations.

[EyeKhan]

Briefly:

[Knux897]

Thanks wiggin Exactly the answer I was looking for

[Hazir]

Tell your dad that if he believes inflation will become really high, he should buy you a truck by credit now, because the amount he'll have to pay back will be far smaller than what he paid in. I.E. Tell him to put his wallet where his mouth is. Just to see how that works, assume there will be inflation of 10% per year. If you buy a car by credit for $10,000 now, that means that those $10k will only be worth $9k a year from now, $8.1k two years from now, etc.

Funny to see you believe in such a socialist spiral.

[Loki]

Funny to see you believe in such a socialist spiral.

I don't, but his dad seems to. Might as well make the most of it.

[GGT]

[...] but I REALLY want to get a truck

Why?

[Veldan Rath]

Why?

It's a boy thing GGT...let it go.

[GGT]

It's a boy thing GGT...let it go.

The question was meant to help him figure out his goal and motivations.

[Being]

The question was meant to help him figure out his goal and motivations.

He probably needs a place to hang his rifle gun where people can see it.

[GGT]

Knux is a teenager, right? Thought maybe he wanted to "impress a girl" with his vehicle. More like ego inflation than economic inflation? Dunno, just wondered.

[Knux897]

Well...

1. I can keep stuff in the back obviously. Dirtbikes, atvs, kayaks etc.

2. Trucks are just badass

3. You can go offroading and mudding

4. I like having a truck because if someone runs into me, it's obviously safer to be in a large vehicle especially with a bed