Inflation Rate Parity

Inflation Rate Parity

Last Updated by WikiWealth

Short Definition

Inflation Rate Rarity (relative purchase price parity): Inflation decreases the value of money over time; whereas, investors seek to increase the value of their money over time. The currencies of low relative inflation countries will increase in value as demand for their currency increases.

WikiWealth uses inflation rate parity to have another indication of currency value. It helps to show the loss of value to currencies with high inflation rates. If one country had a significantly high inflation rate than the target country, money would flow from the high inflation rate country to the low inflation rate country. WikiWealth uses the global weighted average to calculate expect returns, because investors are likely to search a wide sample of countries for investment returns. Since inflation rates change quickly, and in sometimes unexpected ways, WikiWealth makes an adjustment to the inflation rate. The adjustment changes inflation rates over a span of five years from the current inflation rate to the long-term inflation rate.

Countries with higher interest rates typically need them to control inflation, which destroys value and potential over time. The net potential of the inflation rate parity approach is much less, because low inflation (good for investors) usually matches countries with low interest rates (bad for investors).

Long Definition

Source: http://en.wikipedia.org/wiki/Purchasing_power_parity