The media spin on inflation is trying to pacify those most adversely affected by it claiming it is fine or at worst a problem for the wealthy.

November 15, 2021

By: Bobby Casey, Managing Director GWP

inflationHave you seen some of the headlines coming out of the mainstream media? I’m floored by some of these takes!

  • From Bloomberg: “America Needs Higher, Longer Lasting Inflation”

Unbelievable right? Yet, there are people who believe these things which is what is most concerning.

Anyone who understands what inflation is and how it affects the economy, would know better than to say any of those things.

Here is the working definition of inflation per Investopedia:

Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.

Several factors can contribute to what a unit of currency can buy today, but inflation in particular is caused by a glut of money being printed out of thin air as opposed to wealth being created out of productivity.

In the case of the US, quantitative easing coupled with zero and negative interest rates debased the value of the US dollar, and continues to do so. It’s like an abused line of credit. You’re creating wealth that hasn’t yet been earned, so if production doesn’t keep up, you’re basically left holding the bag.

The debt in most countries is created from borrowing against their own treasury bonds… which is why the largest holder of US debt is the US taxpayer.

Let’s take this point for point.

Higher Salaries

It’s true, that wages are up quite a bit for a myriad of reasons, the biggest reason being the shortage of labor. Regardless of the reason, these increases aren’t enough to offset inflation. October CPI came in at a whopping 6.2%, while hourly earnings are up 4.9%, and employment cost index up 3.7%.

These are all just general overall national numbers. Once you break them down by sector, it gets much worse. Energy is up over 25%, while food and household operations are each up around 6% each. If you need a vehicle to get to work or for work, that is up about 17%.

Now weight each of the inflationary effects by how much of the monthly budget they consume and that is the real effect of inflation on that home.

The most disingenuous part of the whole presentation is, the pundits who claim higher wages are great, are totally ignoring the inflationary adjustment:

While the Biden administration is eager to discuss nominal wage growth, it has been mute when it comes to real, inflation adjusted worker income. There is a reason for that. When adjusting for inflation, real average hourly earnings were down 1.2% yoy in October and have been negative for seven consecutive months.

Higher, Longer Lasting Inflation

Holy cow. Where to begin?

First, it’s important to understand the difference between inflation and symptoms of inflation. If you have a cough, that could be a symptom of a cold. It could also mean you have a dry throat. Merely having a cough isn’t enough to diagnose you with one or the other.

Likewise, cost increases are symptoms of inflation, which doesn’t necessarily mean it is inflation. Example would be when the cost of bottled water goes up in areas where a natural disaster struck. That’s not inflation. The value of the dollar remains the same, the value of the bottled water went up.

The cost of water going up in that situation is indeed transient. As are the costs associated with the supply chain issues. But all of it cannot be explained away with this. In fact, if it wasn’t permanent, why are the tax brackets being shifted higher by the IRS in 2022? That’s not the behavior of an administration that thinks this is fleeting “inflation”.

Second, the crux of the argument presented in that article in Bloomberg is that the Federal Reserve would raise interest rates and employers would raise wages commensurate to a higher inflation rate of 4%. I mean that’s a generous assumption for the purposes of selling inflation, but there’s no rule written anywhere suggesting that is implicit in higher inflation.

Historically, wages have not kept up with the rate of actual inflation. That’s because inflation has nothing to do with the supply-chain, and everything to do with the purchasing power of the dollar. Inflating everything at 2% or 4% “evenly” serves no purpose, and that’s not at all how inflation is used or how it works.

This is a Rich People Problem

All that being said, dollar for dollar, there’s literally no way this disproportionately negatively affects the wealthy.

Put into real terms from an article at Zerohedge:

Spending on gasoline and food makes up ~28% of consumer expenditures for the lowest income versus ~19% for the highest income.

Which brings us to the worst news for the Democrats: the combined 9.7% year-to date gain in inflation in food and energy (non-core) has a bigger hit on the lower income consumer and their ability to substitute away is limited given that these are necessary items.

This isn’t rich people problems. This is everyone problems. The ones affected even more than the working poor are the retirees on fixed incomes. They don’t get cost of living increases to their annuities.

Intellectually, I think most people know that inflation’s effects are more of a ripple than a drop. That is to say, it’s felt differently by different people over time. What I didn’t know was this has a name. It’s called the Cantillon Effect:

[T]he first sectors to receive the newly created money enjoy higher profits as their pay increases, but general costs are still low. On the other hand, the last sectors in which prices rise (where there is more economic friction) face higher costs while still producing at lower prices.

In the US, the net outcome is that investors are favored disproportionately over wage earners. Investors being large corporations, heavily subsidized industries, and even those who have a good part of their savings in the stock market will benefit from the injection of money.

Those living paycheck-to-paycheck, not so much. This is why the “stimulus checks” were such a terrible idea. It was a short term stop gap, with long term onerous implications for the poor and working classes.

The US has what’s considered a “progressive tax” system when it taxes more those who make more. The opposite of that, then, would be a regressive tax, which imposes more on those who make less. That is what inflation is: it’s the systemic stealing of value or purchasing power from the poor, and giving it to the rich.

At some point, inflation catches up with everyone to one degree or another. I saw someone say: We aren’t all in the same boat. We are in the same ocean in different boats, so the tides will affect us each differently.

I believe that’s about as accurate a metaphor as you can get. The question then is: what can I do to prepare for choppy waters?

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