According to the just-released Personal Consumption Index (PCE), inflation has gone up 3.9% between June of 2020 and May of this year. This is the biggest inflation jump in a year since 1992. The PCE report showed that energy prices have jumped 27.4% while food costs have increased 0.4% over the last year. There are many questions about whether this inflation increase is going transitory or longer-lasting. The smart money should be on longer-lasting. For example, Bank of America is estimating it will last 2-4 years. It is also worth noting that many of the inflation measures the government uses are designed to spare government officials difficult questions rather than give the public a true estimate of inflation. If you want to buy a house, send your kid to college, and take care of an expensive operation, you’ll find that those sorts of expenses have gone up a lot faster than 2% per year or even 3.9% per year over the last decade or two.
If you are trying to figure out why inflation has gone up so fast recently, it’s not tough to do. The Fed printed roughly 18% of all dollars in circulation last year. Meanwhile, Joe Biden has been borrowing money to pump into the economy at an unsustainable pace and he’s looking to spend even more. On top of all that, pent-up consumer demand from the year most people sat inside while COVID was running wild and bad government decisions have led to shortages. For example, if the government will pay a worker more money to sit at home than he’ll get from working, he’ll sit at home. If a business has no workers because of this, they have to raise salaries to staff their business. If the expenses of a business go up, they often have to raise prices to make up for it. Hello, inflation.
Typically, what the Fed would do in a situation like this is raise interest rates, but there are two huge problems with that. The first is that it makes the cost of servicing our nation’s debt much higher. Our debt is starting to get so high that we simply can’t afford to raise interest rates. This is a dangerous place to be for an economy. It’s like driving on the freeway without ever being able to reduce your speed below 50 miles per hour. If you don’t brake, at some point you are going to crash. It works the same way with an economy. As if that wasn’t enough of an incentive, most people believe you’d see a massive stock market correction if the Fed raised interest rates. This is a huge problem because inflation hurts most people, but the burden falls mainly on the poor and middle class that rely heavily on wages for their wealth. That is why there is no bigger tax on the poor than inflation and it looks like they are going to be paying that tax through the nose for the next few years.
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