What is inflation?
“a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency”
The major ways in which gold comes into the economy are as follows:
- Looting it directly from a mob
- Receiving it as a reward from a quest
- Selling an item to a vendor
- Indirectly through looting as a result of the Cash Flow guild perk
On the other side of the equation, gold leaves the economy primarily in these ways:
- Purchasing an item from a vendor
- AH fees (expired posting fees, AH cut)
- A character is deleted while still possessing some gold
- Item repairs, learning skills, essentially – any NPC interaction that costs gold.
Meanwhile, the following things really have no impact on inflation:
- Buying/selling items directly between players.
- Ghostcrawler nerfing your class to the ground (just making sure you’re still paying attention…)
Why should I care about inflation?
That’s all fine and good, but how does inflation affect us? Simply put, inflation plays a huge role in establishing value, which is something that is obviously quite a big deal for us, as gold-makers. It impact everything from the value of our gold to the value of the junk in your bank that you’ve been meaning to clear out. The biggest reason, in my opinion, though is the role that inflation will play in major investment decisions. Let’s use flipping TCG mounts as an example.
If we are looking to purchase an undervalued TCG mount for 50k, we need to consider both the amount of our return AND the rate of our return, while factoring in inflation in order to make a meaningful decision. Let’s say we post our mount for 100k. That’s a 50k profit, and double our – sweet deal, right? Well, it depends on the amount of time it takes us to sell and inflation. Let’s say that it takes us 5 months to sell the mount. If we calculate an inflation rate of 1% per month, then our 50k cost would carry an effective value of 52.5k gold, 5 months later. That would mean our investment would really only be worth 47.5k profit.If for some bizarre reason, we were looking at an inflation rate of 20% per month, than all of a sudden, our 50k investment will be effectively only be break-even 5 months later.
Granted, these examples are really oversimplifying and exaggerating the role that inflation plays – but the point is to help you realize that being able to accurately measure inflation can help you to more effectively value your goods and make better investment decisions.
What can we do about Inflation?
The most important way to handle inflation is to first of all be able to accurately measure it. I’ve recently started a little project with the aim of accomplishing just that. To participate in the discussion, or to get involved with the project, check out The Consortium Thread and share your thoughts or questions. Once we can effectively calculate it, I believe there will be a number of great opportunities to use this information to take gold-making to the next level. Imagine being able to make even more informed purchasing decisions, or being able to to better leverage your investment power through predicting economic trends long before they even happen. Goblineering at its finest!
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I don’t really see the point of collecting historical data on inflation in WoW. It would be interesting, but I don’t see any practical application.
It’s not important for us to know how much inflation there’s been so much as it is to know how much there will be – and inflation in WoW is just far too dependent on expansion & patch changes for us to be able to predict it.
How much gold you get from quests, how much you loot from mobs, now how much you get for your guild from challenges (which trickles down due to free repairs, flasks, etc), how much items sell for, how many dailies do people do; then how much it’ll cost to reforge next expansion, how much to repair, are there any huge new gold sinks (as void storage could and IMO should have been), etc.
Even if we know exactly how much inflation there was classic to BC, BC to Wrath, and Wrath to current day, without knowing the variables that will be different next time around, we can’t really make any educated guesses about how much inflation will be coming. So unless Blizz starts mimicing the Fed and sets target for their inflation goal, IMO we just need to keep in mind that it will exist.
I agree that understanding inflation is an important part of making an investment decision, but you seem to be looking at it from the wrong side. Sure, you are correct in what you say about the investment scenario you outlined, but the main point is that if you had not bought the mount and held the gold, you would have lost the amount you outline due to inflation guaranteed. Holding real goods (like mounts) in an inflationary environment is the better play, as at least in theory, the value you can sell the mount for should increase by the same amount as inflation – while gold loses value no matter what. But I will be looking at the thread you linked for sure as measuring inflation is key to the maximization of profit!
@Patches – although it wasn’t mentioned in the post, the underlying question here isn’t whether to invest or not, it’s whether to invest in A or B, etc. If you invested that same 50k in something else or spread it out over multiple investments, inflation is going to play a large role in determining which route is going to offer the best overall return.