Everything You Need to Know About Inflation

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by M. K. Matthews

It’s been said that when the U.S. sneezes the rest of the world catches a cold.  Inflation by overall annual average has been below target for some years now, since 2012 to be exact. The Fed usually seeks a 2% inflation as a comfort zone.

Granted, it’s only one data point but with unemployment currently low and some signs that economic growth is accelerating, the suggestion exists that overheating/inflation is a risk for the U.S. economy in a way that hasn’t existed for about ten years.

What is inflation?

Inflation is when the buying power of a currency declines over time.  If inflation is 2% that translates to a basket of groceries which cost $100 today costing $102 a year from now.

But since prices rise and fall and we each buy different articles how is that tracked?  Government statisticians and economists create indexes to reflect a full range of products and services that are consumed weighted by how much the average household spends on each item.

Various ways of measuring are done by comparing the decline of the U.S. dollar compared to other currencies or to gold.  The aggregate of the items compared can show how prices are changing over time considering the range of items the average household purchases

This leads to the next question, “is inflation good or bad?”

It can be either.  In places like Venezuela today or Zimbabwe a few years ago, inflation was so out of control that the currency ceased to function as a means of exchange and the population was forced to resort to a barter system.  This led to a breakdown in the two countries’ financial systems.

A milder version was in 1980 when the U.S. rate of inflation reached 14% and was still quite harmful.  The ones who were lucky enough to have savings or pensions saw their buying power erode over time and borrowing costs (credit cards and mortgages) to skyrocket.

But when inflation becomes deflation that too can be harmful.

Deflation translates into purchasing power rising over time which means debts would become burdensome and consumers and businesses would spend less and hoard cash.  This is what the U.S. experienced during the Great Depression.  Japan and Europe have been experiencing this for at least a decade in a milder form.

How did it come to be that 2% inflation is considered “the perfect amount?”

It’s a bit subjective and has been determined as the optimal amount over the last couple of decades by central bankers around the world.   That being said, some economists argue that a slightly larger amount might be preferable as it would help to ward off recessions.

In 2017, using the inflation measure that the Fed most relies on, prices increased by 1.5%.  That’s based on the consumption expenditures price index, excluding food and energy since those prices are swayed by factors unrelated to underlying inflation trends.  Since 2012, the Fed has consciously chosen to undershoot the target in an effort to keep interest rates low and to stimulate the economy.

In 2018, inflation rates have moved slightly upward as follows:

  • January 2.07
  • February 2.21
  • March 2.36.

How does this affect the stock market?

With the current low unemployment rate and the recent tax cut, the economic growth rate may rise even higher.   

If the inflation rate exceeds the Fed’s preferred 2% rate, the Fed will raise interest rates to slow the growth to keep it from overheating.  This, in turn, will make the cost of borrowing money cost businesses more and also slow consumer spending.  This will adversely affect the price of stocks.  

As was discussed in my last article, we already know the Fed plans to raise interest rates several times this year.

Let’s hope the Feds are like Goldilocks and finds the bowl of porridge that is just right.

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  • The author left out the really important causes of inflation. 1) All money is created out of thin air when bankers issue loans. 2) Like a game of musical chairs, there is never enough money in circulation to pay off both the principle and interest. 3) To keep this debt-slavery scam working, the money supply must be gradually increased. 4) The actual inflation rate and total money supply are unknown. The Inflation statistics reported by the government are highly politicized and often have no basis in reality due to deceptive statistical trickery (lying). 5) All governments in the western world ceded their regulation of money creation to private bankers whose purpose is to keep us continuously buried in debt. 6) Inflation (money losing value) is a symptom of this legalized-counterfeiting, debt-enslavement scam.

    • 1. No. Money is not created out of thin air. When you finance a particular product, the lender pays for it from its own investment capital or third party investors. Banks lend you the money based off you reliability and income, two factors which form you credit score.
      2. Circulation is no a game of musical chairs. What is certain, is enough value exists for loans to be paid off. Your argument there is not enough cash supply for you to pay off you loan is false.
      3. There is no debt slavery system. There are opportunities for you to engage in contract which enable to have those thing which you do not have money for. Its voluntary for you to enter into a contract, thus not slavery. If anything could be considered slavery, I would look at student loans. Young naive individuals enter into agreements, which are not forgiven, selling off their youth and future income. Its a scam to sell someone a fake education, from which they will not be able to produce income.
      4. You basically right. Money supply is difficult to account for; however, inflation rate is dependent on the money supply (its just one factor from a multi variable system). If inflation is understood accurately, then a money can be partially understood. If money supply was high, then money supply would be too high.
      5. The transfer of responsibility for printing the money supply was quite nefarious. In the end, a reliable money supply as a tool to temper inflation is performed by the private industry. I do not see any reason so suggest the government could do a better job of maintaining the integrity of the money supply.

      • Sorry Dean, you are mistaken. The bankers have you right where they want you. Your point #1 is wrong, therefore, so is the rest of your argument. If you were correct, the money supply would never increase as you claim there is always enough money on hand to pay for anything.

      • Sorry Dean, Everything Pete said is correct. There have been Supreme Court cases that ruled that mortgage contracts were invalid because the banks put up nothing of value that they previously had, meaning they created the credit out of thin air.
        The so called “money” is created as a debt instrument but the “money” to pay the interest on the loan is not created thus as soon as 1 cent interest is due, it is a mathematical certainty that someone, somewhere will default on a loan.
        Have you ever heard of someone being denied a loan because the bank ran out of money? Imagine this, you have an 800 credit score and apply for a car loan at Bank of America, the loan officer says “Sorry, we just loaned out our last $10,000 to a different customer 5 minutes ago so we can’t approve your loan.” That never happens.
        The banks create credit out of thin air and IT VERY MUCH IS a debt slavery system.
        You should youtube Debt as Money for a more detailed explanation

  • The ‘official’ Consumer Price Index (CPI) published by government agencies is a joke. Here in Canada the official CPI is always far below what consumers actually experience. While the last official CPI published by Statistics Canada was 2.3%, here are some price increases (mostly in healthcare) that our family has experienced (current prices compared to 2017):
    Physiotherapy-4.6% increase; Chiropractor-13.2% increase; Municipal taxes-3% increase; Social Worker-16.7% increase; Internet-46.7% increase (previous ‘package’ no longer available); Water-2.1% increase; Wastewater-11.6% increase; gasoline-21.5% increase.
    How our politicians, mainstream media, and economists can state with a straight face that price increases are in the 2% range and relatively tame baffles my mind. At some point society has to reach a tipping point and see that the whole bloody system is a charade and little more than a Ponzi scheme on the verge of collapse, and all we get from our ‘leadership’ is lies, misinformation, and propaganda.

  • Hyperinflation does not happen overnight. I’m old enough to remember the inflation problems that happened when Nixon was President. Has our inflation reached that high again since then.
    Has anyone noticed that our inflation has increased after Trump signed a huge tax cut? one that mainly helped people who were in the top 1% economic group.,

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