Not a news flash: inflation hurts; but not everyone has the same agenda.
- Politicians are interested in popular support – they compete for ballots.
- The news media is interested in popular viewership – they compete for ratings
- Neither of them are concerned about educating the pubic and, unfortunately, the public at large often turns to their phones or flat screens for entertainment disguised as information.
Everyone wants to see prices go down – it means we can buy more! But, here’s what isn’t being told: declining prices is deflation. So what?
A little history:
Back around 1979-80 prices were rising (inflation) at a double-digit rate – as much as 15-17% annually. As a result, many people were engaging in ‘defensive buying’, i.e., buy now – it’ll only cost more later.
Deflation is taught us the opposite is also true. When prices are dropping, people stop buying because they think prices will go lower in the future. Unfortunately, when prices fall, so do paychecks as businesses can pay less for labor. Prices and paychecks may decrease, but debt doesn’t – welcome to the Great Depression. Not good. Prices falling means your house is worth less and other assets are depreciating, as well.
If a bank advertises 1% loans when prices fall by 5%, the real interest rate on that loan is 6%. Money is worth only what it will purchase.
So, why are we being told inflation is getting under control and people still feel pain? It’s the rate that’s declining, not the nominal dollars. If inflation used to be 8% and now the rate is down to 3%, that item you want to purchase still costs 3% more than last year – on top of all the previous price increases. And, salaries, etc., haven’t caught up yet. Simple.
Is inflation good?
A certain amount, yes, which is why the Fed has been targeting 2% for many years now through multiple administrations. Modest increases contribute to productivity and job growth.
For those of you who like reading about this stuff, you might check out Basic Economics by Thomas Sowell and Naked Money by Charles Wheelan. I also recommend Boom and Bust by William Quinn and John D. Turner – a global history of financial bubbles.
Will your long-term financial plan survive for the next twenty to thirty years? Start planning now! You can get started here.
Enjoy!
