Interest rates and inflation

What does return mean?

Profit

What is inflation?

An increase in prices over time.

What are measures of inflation?

CPI (core consumer price index), core CPI (core consumer price index), and PPI (producer price index)

What is CPI and who publishes it?

Consumer price index, Published by the government and measures inflation experienced by consumers

What is core CPI and who publishes it?

Core consumer price index, Published by the government and excludes the volatile categories like goods and energy

What is PPI and who publishes it?

Producer price index, published by the government, inflation experienced by wholesalers

What does real mean?

Adjusted for inflation; having the effects of inflation pulled out.

What is real interest rate?

The rate of interest after the effects of inflation has been removed?

What is positive real interest rate?

When interest rate > inflation

What is negative real interest rate?

When inflation > stated interest rate

What is risk-return trade-off

The greater the risk, the greater the POTENTIAL return

We assume investors are risk adverse, what does this mean?

They don’t like risk, they must be COMPENSATED for taking risk

What is positive real return?

When return > inflation

What is negative real return?

when return is < inflation