“Ouch, The Pain of Inflation”

“Ouch, The Pain of Inflation ” by Phyllis Hunsinger    8/2021             

                “If you want to get someone’s attention, hit them in their pocketbook,” is a saying that has been around a long time. Perhaps the truth of this saying may become blatantly obvious as gas prices rise between fill-ups, grocery items cost more each time they are purchased, and utilities and housing costs are skyrocketing. Inflation receives the bulk of the blame, but exactly what does that mean?

                Inflation, as it pertains to economics, is defined as a general increase in prices accompanied by a decrease in the purchasing power of money. The rate of inflation is commonly measured by the Consumer Price Index, CPI. This rate is computed by taking a weighted average of price increases in the products of a typical consumer. The products are weighted because consumers buy some items in larger quantities, impacting the consumer more than items bought in smaller quantities. The CPI also takes into consideration the price of a product. A 10% increase in the price of a car has much more impact than a 10% increase in the cost of a candy bar. Government accountants at the Bureau of Labor Statistics include the following categories in their representative consumer products: housing (41%); transportation (17%); food and beverages (16%); medical care (6%); recreation (6%); apparel (4%); and other (4%). The principle of supply and demand applies to inflation. If the money supply increases by a larger percentage than production, the price level will rise.

                Inflation has a negative effect on all consumers; however, the impact on lower income earners is magnified. Since these earners pay a larger percent of their income for daily living expenses, healthcare, and education, inflation makes it even more difficult for these earners to afford necessities. Individuals’ savings accounts suffer because money saved for future use will have less value. Investments are not as attractive when inflation is rising because any profit anticipated must factor in the added cost of inflation. A decrease in investing harms the wealth of the nation. Inflation harms the economy.

                The government is culpable. The government spends money it does not have. The government has no way to acquire money unless it confiscates it from the citizenry through taxation or prints money. The government has been printing a lot of money lately and promises to raise taxes as well. Inflation is a boon to the government because the government has borrowed huge numbers of dollars it will pay back with devalued dollars. Often inflation raises nominal wages and pushes people into higher tax brackets resulting in more tax dollars for the government. The main beneficiary of inflation is the government.

                Despite inflation being useful to governments, history is replete with examples of excessive inflation where the currency becomes worthless. Economies tend to break down whenever this happens. The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is high, the Federal Reserve can raise interest rates to slow the economy and bring down the rate of inflation. If inflation is low, the Federal Reserve can lower interest rates to help stimulate the economy and raise the inflation rate. The work of the Federal Reserve is not an exact science.

                As the government continues to spend money it does not have, the value of the money consumers spend will continue to decrease in value through inflation. The pain has just begun.

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