Fisher's formula is the real bet. Fisher's formula: inflation and its impact on real returns. III. Capital and reserves

Good day, dear readers and guests of the blog.

Topics about inflation never fade away; moreover, they leave many perplexed: “Why is inflation in the country falling, while prices are constantly rising?” Are we being deliberately misled? The time has come to finally find out everything and figure out what's what.

Inflation is an economic indicator that is accompanied by rising prices for goods and services. In other words, over time, with the same money, people can buy fewer goods and services than before. During such a period, the exchange rate of the national currency falls.

Almost the entire market segment can suffer from inflation. And it doesn’t matter what it might be: a rise in food prices, a decrease in purchasing power, etc. For example, the price of gas rose and a chain of inflation immediately developed - everything related to gas immediately became more expensive: gasoline, transportation of goods. The dollar has risen - everything that is bought with this currency has risen in price. Do not forget that world prices influence and are important. Let's figure out what inflation is and methods for calculating it using various formulas.

As we already know, inflation is an economic indicator. The general price level is calculated based on a fixed set of consumer goods, taking into account the structure of their consumption. This also includes medium- and long-term goods and services. What indicators are used for calculation? Just two:

What does the inflation index show? First of all, it determines how many times the price level has changed. If the indicator is greater than one, then prices have risen, but when the index is equal to one, the general price level is inactive, that is, it has remained at the same level. If the index is less than one, then the general price level has decreased.

If the inflation index shows how many times the price level has changed, then the inflation rate will show how many percent the general price level has changed. But what relationship do these two formulas have?

It's actually simple. When the inflation index is greater than one, prices rise. In this case, the inflation rate will be positive. If the inflation index is less than one, then the inflation rate will take a negative value.

Summary inflation indicators

For several centuries, scientists have tried to create accurate calculation methods that could estimate not only the value of the market basket, but also its composition.

Price and income indices using the Laspeyres formula

Statistician Etienne Laspeyres developed his method of indexing inflation in the 19th century. Its formula shows a comparison of the consumer basket according to the current and base periods and the difference between them.

By showing price fluctuations in the base period, the index excludes changes in cost in consumption patterns. Therefore, he gives a high estimate of inflation if prices rise, and vice versa, a low estimate if they fall.

Paasche index

This calculation method appeared in 1874 by the German economist Hermann Paasche. It is determined by consumer expenditures of the current time to the base period, with the same basket assortment.

The Paasche index shows what changes have occurred: how many times the average price level has increased/decreased. Namely, the price change in the current period. By observing the movement of prices in the consumer basket, this formula is not able to fully capture the income effect. As a result, inflation is overestimated when prices fall, and vice versa, underestimated when prices rise.

Fisher index

Both formulas have their own errors. But the American economist Fisher considered combining them in order to derive an average value.

Nowadays, his method is not as widespread as the previous ones, but also worthy of attention. After all, it is reversible in time, that is, if the periods are rearranged, the value will be the reciprocal of the original index.

Hamburger index

An interesting technique that cannot be ignored. The name "burger" has a direct meaning. After all, in fact, this popular fast food is sold in every country, so it immediately attracted attention. Thanks to it, you can determine the index for assessing the cost of identical products in different countries.

According to numerous calculations, it turned out that in the previous year Switzerland took first place in the sale of expensive hamburgers costing $6.80, and the cheapest was found in Venezuela, for only 0.67 cents.

Such a simple and unique method was able to show the discrepancy between currencies in countries where the income level is almost the same.

Inflation is always bad for the average person.

Who benefits from inflation?

1. Exporters who sell their goods abroad receive foreign currency there, and national currency here. The benefit is obvious
2. Debtors who owe a fixed amount.
3. Banks that issue low interest rates on deposits. We received money into circulation, but by the time it needs to be returned to the investor, it has depreciated.
4. To the state, to increase the level of economic growth by lowering loan rates for manufacturers. This helps stimulate the economy.

What is personal inflation?

The range of the consumer basket is formed and modified by official bodies. However, the set of baskets for each family/person is different. For example, a raw foodist is not interested in buying meat and other products that are harmful to him, or a professional athlete primarily purchases sports nutrition.

Inflation is individual for each of them and will depend on fluctuations in prices for the necessary things. In addition, it is important to take into account all changes in the volume and quality of consumption. Let's say, if a girl decides to lose weight - the amount of food will be sharply reduced, as she will eat less, or children have appeared in the family - expenses, of course, will increase.

Determining personal inflation is simple:

Where, S1 is the amount of expenses in the first month, and S2 is the amount in the next month. But even this method is not able to accurately calculate individual inflation. Since it excludes external factors influencing the value.

But it is worth remembering that inflation at the state and at the personal level, because these are completely different concepts. Official data reflects the state of the economy. Individual inflation shows the trend in an individual family. If the latest news alarms you, and inflation rates are rising again, do not panic. Plan and manage your expenses in a timely manner so that external shocks affect you as little as possible.

Sincerely, . See you again!

Using I. Fisher’s formula, you can obtain a formula for finding the real rate of return

Example

What real level of return will the investor provide for himself if the predicted inflation rate is 12% per year and the announced return is 16%?

Thus, when determining the integral performance indicators of an investment project, both nominal and real discount rates can be used as a discount rate. The choice depends on the nature of the cash flow. If the cash flow is presented in base and deflated prices, then the real discount rate should be used. If the cash flow is presented at a forecast price level, then the nominal discount rate should be used.

4.5. Analysis of the financial condition of the enterprise –
project participant

The need to analyze the financial condition in investment planning arises when filling out a loan application to the bank. The borrowing company must confirm its solvency. In addition, the assessment of the effectiveness of the investment project should be supplemented by calculations on the impact of the project implementation on the main financial indicators of the enterprise participating in the project.

In accordance with the Methodology for evaluating investment projects, four groups of indicators are used to solve the problem:

1. Liquidity ratios, which characterize the company’s ability to pay off its short-term obligations:

Current ratio;

Quick liquidity ratio;

Absolute liquidity ratio.

The methodology for calculating liquidity ratios is described in detail in section 3.5 of the textbook.

2. Indicators of solvency and financial stability, used to assess the ability of an enterprise to meet its long-term obligations:

– ratio of borrowed and equity funds;

– long-term borrowing ratio;

– long-term liabilities coverage ratio.

The method for calculating the ratio of borrowed and equity funds is given in section 3.6 of the textbook.

The long-term borrowing ratio () is calculated using the formula

where are long-term liabilities; - equity.

The long-term liability coverage ratio () is calculated using the formula

Where P H– net profit; A– depreciation; D SK– increase in equity capital during the year; D ZS– increase in borrowed funds during the year; TO– the amount of investments made in the reporting year; PDO– payments on long-term obligations (repayment of loans and payment of interest on them).

3. Turnover rates, are used to assess the effectiveness of operating activities:

– capital turnover ratio;

– equity capital turnover ratio;

– inventory turnover ratio;

– accounts receivable turnover ratio;

– average turnover period of accounts payable.

The methodology for calculating turnover ratios is described in detail in section 3.9 of the textbook.

4. Profitability indicators, are used to assess the current profitability of the enterprise participating in the project:

– profitability of sales in terms of profit before tax and net profit;

– return on assets (capital) in terms of profit before tax and net profit;

– return on equity.

The methodology for calculating profitability indicators is described in detail in section 3.8 of the textbook.

The specified list of indicators can be supplemented at the request of individual project participants and financial structures.

The indicators are analyzed over time and compared with the indicators of similar enterprises.

The methodology for a more complete analysis of the financial condition of an enterprise is given in section 3 of this textbook.

DEFINITION

Inflation is an economic process that manifests itself as an increase in prices for consumer products due to an increase in the amount of money in circulation. Inflation is the depreciation of money due to an increase in its quantity, so consumers receive different quantities of the same product for the same amount of money.

Inflation is expressed in the following factors:

• rising food prices,
• decrease in the purchasing power of money,
• falling living standards of the population, etc.

High inflation rates indicate crisis phenomena in the economic situation in the state, so it must be reduced by all possible means.

In our country, every year the bodies of Rosgosstat conduct research into statistical data and identify key economic indicators.

Price index

In order to understand the essence of the inflation rate formula, you should refer to the indicators used in its calculation.

The main indicator of inflation is the price index, which measures its level and rate. The consumer price index is determined on the basis of the consumer basket, which is a list of necessary products for the normal functioning of society. The composition of the consumer basket is established in each state at the legislative level.

In order to calculate the consumer price index, you need to determine the base year, which represents the starting point for changes in the cost of products (services). Next, you need to determine the cost of the consumer basket for the base and current year.

To calculate the price index, the value of the current year basket is divided by the same value of the base year.

The price index formula is as follows:

Ic = PC tg / PC bg

Here Ic is the price index indicator,

PC tg – consumer basket of the current year,

PC bg – base year consumer basket in value terms.

Inflation rate formula

Once the price index has been determined, the inflation rate can be calculated. The general formula for the inflation rate is as follows:

Here CI1 is the price index indicator of the current period,

CI 0 – indicator of the price index of the base period.

Inflation is a dynamic process and therefore tends to increase. It is the inflation rate formula that shows the growth of inflation over a certain period of time. The pace characterizes the rate of increase in prices for basic products and services.

By calculating the inflation rate using the formula, you can determine its type (character):

• Creeping inflation (about 10% per annum),
• Abrupt inflation (from 10-20 to 50-200% per annum),
• Hyperinflation (more than 50% per month)

The mildest form is creeping inflation, which is easily controlled and preventable. Other types may indicate a structural crisis in the state’s economy, and immediate measures are required.

Examples of problem solving

EXAMPLE 1

EXAMPLE 2

Inflation is the process of increasing prices of goods and services over time. The inflation index is used to determine its level.

The concept of inflation. History of appearance

Inflation as a phenomenon in the financial system was known in the ancient world. However, in those days it was different from what we see today. For example, inflation was caused by the overminting of coins or the use of copper instead of precious metals in their production. This process had the common name “coin deterioration.” By the way, historians even managed to find data on the depreciation of the monetary unit of Ancient Rome sesterce.

Until the middle of the last century, inflation was perceived by the population as a natural disaster. And only after the introduction of widespread statistical recording of the activities of business entities in the USA, Japan and many Western European countries was it possible to contain inflation. At the same time, the property rights of producers were not infringed. In addition, the measures taken did not have a negative impact on the level of competition for goods and services in domestic markets. It should be noted that in addition to statistical control, the creation of a system of distributed price regulators had a major role in curbing inflation.

Inflation in the USSR

There was no inflation in the Soviet Union. Except for the so-called “deficit”. The fact is that in the USSR there was such an organization as the State Price Committee under the Council of Ministers of the USSR. Its functions included regulating the relationship between producers and consumers. This happened by controlling production costs and profits.

This standardization was carried out by the Research Institute of Planning and Standards under the USSR State Planning Committee (NIIPiN). His tasks included developing profit rates that would be scientifically justified. In addition, the institute worked to determine the norms of intermediate consumption, as well as other costs of various institutions and organizations, taking into account their regional, sectoral and technological characteristics.

Inflation forecast

In order to accurately predict the future activities of an enterprise, it is necessary to evaluate not only its own internal resources, but also additional factors that do not depend on the organization. These factors are a consequence of the characteristics of the external environment, but at the same time they have a great influence on the performance of each manufacturer. These parameters also include inflation, which can be predicted using the inflation calculation formula.

The source of macroeconomic information is government agencies, which conduct analyzes and make forecasts regarding the economic and financial situation. In addition, they monitor trends in the exchange rate of the national currency, price increases, as well as assess the structure of the cost of goods and services not only in the country, but throughout the world. In the process of forecasting the financial and economic development of an enterprise, it is necessary to take into account inflationary changes. They have a significant impact on many aspects of the organization's activities.

Inflation index

One of the main and clear indicators of money depreciation is the inflation index. The formula by which it is calculated helps determine the overall increase in the cost of goods and services in a certain period of time. It is determined by adding the base price level at the beginning of the reporting period (assumed equal to one) and the inflation rate for the interval under consideration. The inflation formula in this case is as follows: II t =1+TI t, where

TI t - annual inflation rate. This indicator characterizes the overall increase in the price level during a given time period and is expressed as a percentage. In turn, this indicator is calculated using the inflation rate formula: TI t = (1+TI m) 12 -1, where

TI m is the average monthly inflation rate, provided that it is uniform throughout the year.

When planning the company's annual budget, the following indicators should be taken into account:

1) inflation, changing over time. Here it is necessary to take into account the fact that inflation dynamics often do not coincide with exchange rate fluctuations;

2) the possibility of including several monetary units in the budget;

3) heterogeneity of inflation. In other words, prices for different types of goods, services, and resources change differently and their growth rates may differ;

4) state regulation of the cost of certain groups of goods and services.

Taking into account inflation when calculating the profitability of financial transactions

When calculating the required level of income from financial transactions, it is necessary to take into account the inflation factor. At the same time, the tools that are used in the calculations are designed to determine the amount of the so-called “inflation premium”, as well as the general level of nominal yield. The presence of the inflation rate in this formula allows the company to ensure compensation for inflation losses, as well as obtain the required level of net profit.

Calculation of the "inflation premium"

To calculate the required amount of the inflation premium, the following formula is used:

Pi = P x TI,

where Pi is the volume of the inflation premium for a specific period of time,

P is the initial value of the money supply,

TI - inflation rate for the considered time interval in the form of a decimal fraction.

The formula for taking into account inflation when determining the total required level of income from a financial transaction is as follows: Dn = Dr + Pi,

where Дн is the total nominal volume of the required income of the financial transaction. In this case, the inflation factor for the time period under consideration is taken into account.

Dr - the real amount of required income from a financial transaction in the period of time under consideration. This indicator is calculated using simple or compound interest. The calculation process uses the real interest rate.

Pi is the inflation premium for the period under review.

Calculation of required yield

To calculate the required rate of return from financial transactions taking into account the level of inflation, the formula is as follows:

UDn = (Dn / Dr) - 1.

Here UDN represents the required degree of profitability from financial transactions taking into account inflation in the form of a decimal fraction, Dn is the total nominal amount of the required income of a financial transaction in the period of time under consideration, Dr is the real amount of the required income from a financial transaction in a given time interval.

Accounting for inflation using foreign currencies

It must be emphasized that it is quite difficult to make an accurate forecast regarding the inflation rate using the formula. In addition, this process is labor-intensive, and the result largely depends on the influence of subjective factors. Therefore, you can use another effective financial management tool.

It consists of converting funds that will be received in the form of income from financial transactions into one of the main and stable world currencies. This will completely eliminate the inflation factor. In this case, the exchange rate valid at the time of calculations is used.

Fischer formula

Fisher's inflation formula was first published in his 1911 work The Purchasing Power of Money. To this day, it is a reference point for those specialists in the field of macroeconomics who are convinced that its growth depends on the amount of money in circulation. The author of the formula is the American economist and mathematician Irving Fisher. The essence of the formula is the definition and attitude to credit funds, interest and crisis phenomena. It looks like this: MV=PQ,

where M is the volume of money supply that is in circulation, V is the velocity of circulation of the mass of cash, P is the price, Q is the quantity of products and services sold. Fisher's inflation formula is a macroeconomic relationship and still stands as one of the most important and used tools. In simple terms, this equation shows the directly proportional relationship between the level of prices for goods and services and the volume of their production, on the one hand, and the amount of money supply in circulation, on the other. At the same time, the mass of cash is inversely proportional to the speed of circulation of the total mass of cash.

Money supply in Russia

At the moment, the rate of turnover of the money supply in the Russian economy shows a tendency to slow down. At the same time, sharp jumps in this indicator, as a rule, correspond to sudden changes in the ruble exchange rate relative to major world currencies. The slowdown in the circulation of the money supply has two main reasons. The first is a slowdown in the growth rate of gross domestic product. The second reason is the increase in inflation rates. In the future, this state of affairs may lead to a situation where the money supply becomes simply immeasurable.

Here it is necessary to return to Fischer’s formula and emphasize one interesting detail. The rate of turnover of the money supply is a consequence of the parameters of the equation. At the moment, there is no established methodology for monitoring this indicator. Nevertheless, the inflation formula itself, due to its simplicity and ease of understanding, has taken root in modern macroeconomic theory.

One of the main problems of the monetary policy of the Russian leadership is its frivolous attitude towards high refinancing rates. This, in turn, is the reason for the fall in the level of industrial production and the stagnation of the agricultural sector of the economy. The country's leading economists understand the harmfulness of this approach.

But today we have to note with regret that government officials of the Central Bank and the Ministry of Finance, who are responsible for monetary policy, are following the interests of monopolists. These groups of entrepreneurs benefit from maintaining the current situation in the dynamics of price changes and their structure.

In accordance with this formula, the price level is determined by the formula: P=MV/Q

Amount of money in circulation (money supply) M = PQ/V

Based on this formula, Fisher concludes that the value of money is inversely proportional to its quantity. Fisher's formula MV = PQ allows us to explain the phenomenon of inflation from the point of view of violations in the sphere of paper money circulation. Economic interpretation of the formula M = PQ/V: the greater the national product created in the country, the more money should be in circulation. With an increase in the physical quantity of goods and the prices of these goods, the money supply must be increased, and, conversely, as the number of goods and their prices decrease, the money supply must be narrowed. In conditions of inflation, the amount of money in circulation turns out to be sensitive to the price level. For the normal functioning of trade and money circulation, it is necessary to increase the money supply in accordance with rising prices. Failure to comply with this principle leads to disruptions in the functioning of the commodity-money system and a shortage of money in circulation. State control over the money supply is necessary in order to influence prices, production, and the economy as a whole.

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