With Inflation, Reality Is Hidden Behind The Numbers.

Inflation is not a guessing game anymore; it’s here. Every time you buy gas at the pump, groceries at the supermarket or book a plane ticket, the price increases are staring you in the face. That much is clear.

What is less clear are the thousands of ways that inflation hurts you that are invisible. The most important of these is that inflation is a tax. The government borrows dollars, and you earn dollars.

Taxation is one way that governments take money from citizens to pay off government debt. But taxes are unpopular and hard to get approved by Congress.

Inflation works much better. It reduces your real income since the dollars you earn are worth less. And it reduces the government debt because the money the government owes is easier to repay for the same reason – the dollars are worth less.

So, inflation works the same as a tax increase except that you can’t see it and Congress doesn’t have to lift a finger.

Another damaging effect of inflation is described in this article. It has to do with the difference between nominal income and real income.

Nominal income is the amount of money you make measured in dollars. Real income is the amount those dollars are actually worth when adjusted for inflation.

For example, your wages might have gone up 5% (that’s the latest annualized wage increase as of April 1, according to the Labor Department). That’s a nice gain, but with inflation of 7.9% (also the latest data we have), your real wages actually went down 1.1%, (5.0 – 7.9 = -1.1). You got a raise in nominal terms, but you took a pay cut in real terms.

Many people are not familiar with this simple formula for converting nominal gains to real gains. But everyone is familiar with how long your paycheck lasts.

More and more Americans are finding that by the time they pay the rent or mortgage, put gas in the car, buy groceries, and pay some medical bills, they’re out of money. They’re waiting for the next paycheck. There’s nothing left over for a dinner out, a new pair of shoes, or a visit with family members.

The economic consequences of this decline in real incomes are huge. If you buy coffee at the grocery store instead of going to Starbucks or go jogging instead of paying a visit to the gym, then service and retail industries all around the country start to suffer. This can be followed by layoffs at some of those outlets and even more cuts in discretionary spending as the laid-off workers tighten their belts.

A lot of the inflation today comes from the supply side, not the demand side. It has to do with supply chain disruptions and the cascade of consequences from the economic sanctions because of the War in Ukraine.

None of these situations will show any improvement in the short run. There is practically only one way for the Fed to stop the inflation. That’s by raising rates until they cause a recession.

It’s a fair question whether the cure (recession) is worse than the disease (inflation). The one thing that is certain is that consumers are fed-up and will be taking their frustration out on politicians at the ballot box this November.

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