We have all heard of the term inflation but I doubt that most people know what it means in general and what it means specifically to them. The reason for writing this article in June 2021 is that this month hit a new high not seen since 2008. The rate is now 5.4%. This April it began to increase rapidly. Since 2008 we have been blessed with low inflation hovering under 2%. At 2% most of us can live comfortably. Life starts to get challenging when the rate gets as high as it is now or even higher.
Before I get to what Inflation is or what it will do for or to you, let’s first talk about some history. I bought a house years ago and paid 13% interest. That was a bargain because just one year before that time, interest rates to buy a home was at 17%. These rates were a direct result of very high inflation which increased the cost of everything. 5.4% seems tame compared to the good old days of 15% inflation.
The good part of inflation. If you owe someone money, you will be paying it back with money that has a lower value. This happens when you receive raises at work that is slightly higher than the last one as your employer tries to keep up with inflation. At the products that your company makes go up in price, the company has more money to raise your salary.
You own on a mortgage loan which has a fixed interest rate which means that $1,000 you pay in principal and interest each year will stay the same for 30 years while your income which started at $60,000 per year will in 30 years possibly be $300,000 or more. This is how inflation works when you owe someone money.
On the other hand, when someone owes you money, you are paid with worthless money. You loaned your brother $50,000 at 5% interest for 10 years. Interest rates for that type of loan could be at 8% in two-five years but you can not change the rate on your brother. You lose the opportunity to earn more money as he pays you with money that is worthless.
If you are on a fixed income, you can be hit hard. 5.4% means that the gallon of milk that cost $3.50 will now cost $3.69. This does not seem to be much but apply it across the board, meat, baked goods, and even insurance for your home. We have all seen the price of gasoline double and prices of many other things go up e.g. lumber. All of this is inflation. When you are drawing $2,000 per year on Social Security, the current inflation rate would carve off $108 from each check. That can hurt.
Inflation is a tax. Yes, it’s a tax. Not only is it a tax, but it is also a “regressive” tax which means that it hits the people with the least income the hardest. While there are some winners with inflation, there are many losers. The winners have a nice gain that may not mean much in the scene of things but the losers could see their living circumstances change as a result.
When you hear a politician tell you that they want to tax the hell out of big corporations what they are actually saying is that they want your money. They know full well that corporations are owned by people. People who invest and rely on dividends. When corporations get big tax bills, they pass the bills along to their customers. After all, they can not print money and people would not buy their stock if it will not generate a profit. The same is true of wealthy people. When you tax them, they move their money to places where it will not be taxed. This means that the taxing authorities lose the revenue which is used to support your streets.
Government spending is the primary reason for inflation. The government has to borrow to support the spending. If they increase the money supply by essentially printing more, they debase the currency (making it worthless). Instead of printing more money, they levy taxes to repay those free benefits. The higher the taxes, the higher you pay in the store.
It’s one thing to create a progressive tax which is generally based upon how much you consume and it’s another to create a backdoor tax such as inflation. With a progressive tax e.g. sales tax on gas, the more you use, the more you pay. If you are retired and not driving to work, you can save money. When the corporation that supplies the milk you drink is taxed to death, the cost of milk will be higher. Most politicians do not want to tax you directly such as raising the sales tax. Instead, they raise fees and taxes on businesses that are transparent to you but in the end, you pay the bills.
What do you do in periods of high inflation? Buy property. Something that appreciates. Even buying a car is not a bad move if you need one since the prices will go up if you wait. Remember, if you owe someone inflation is usually a good thing. Of course, do not take on debt for something you do not need but if you must, do it in periods of high inflation. The money you pay back is worthless.
