"Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man." ~ Ronald Reagan
Is there an inflation issue in the US? People are always talking about prices going up. We see it and feel it in prices every day. Yet, when we hear or read about the latest inflation numbers, they are always low. We feel inflation but it is not reflected in the numbers.
Let's look at how inflation is measured.
In the world of economics and investing, it can be difficult to get a clear picture of current economic conditions. It is even more difficult to predict what will happen. There is no shortage of opinions. You can find optimistic and pessimistic interpretations of what is happening and what might happen. There always seems to be a new book warning us of an impending market crash and how to not only survive it, but profit from it. There are also books talking about the upcoming boom market and how to profit from that.
In the effort to provide a clear view of the future or what the future might be, we need to be able to rely on clear economic indicators. Two of the most important are those that measure unemployment and inflation. In order to make decisions, it is important to have good measures for these fundamental dimensions of the economy. We need these measures to be rock solid and accurate indicators. We need them to be rock solid and accurate so that we can make the most informed decisions possible.
Since the Great Recession, the unemployment rate has been under fire. A large number of people believe that it is flat-out understated. The reasoning behind this is that the methodology used to calculate the numbers does not take into account those that have stopped looking. It certainly does not mention the vast number of people who feel they are underemployed and underutilized. The gap between the reported unemployment number and what many believe to be the real unemployment is estimated to be 3 to 5 percentage points.
Lately, there has been more buzz on the inflation numbers. We get reports month after month, and quarter after quarter, that inflation is not really a problem. Yet, talk to anyone about the day to day costs of groceries, gasoline, and postage. Most will report that it feels like prices have gone up beyond what is reported in the official inflation numbers. Wages have not appreciably increased and the prices of many everyday items have increased. The argument on the flip side is that sure some prices have increased but some have dropped and others have remained flat; therefore, inflation remains low. Two-thirds of the inflation index is based on wages and salaries, which as we know, have stayed flat or declined for the vast majority of Americans.
The calculation of the measures of inflation, primarily the Consumer Price Index, have changed over the years. The changes are made to account for and keep up with the products people buy and in what proportion these goods and services are purchased. One view is that if we calculate inflation as we did in 1990, our current inflation rate would be about 6% versus the 1.5% that is average reported. Many agree that it feels like 6% and not 1.5% or even 3%.
One report stated that the price of gold has increased 70% in the past few years. If we were to consider the antiquated gold standard as an inflation indicator, we would be reporting much higher inflation. Gold used to be the element which backed currencies. Since there is not enough gold to back currencies dollar for dollar, it has become a quasi-currency. The price of gold is an indicator of economic confidence when the price is low. When the price of gold is high, as it is now, there is a lack of economic confidence. Gold is also an indicator of inflation because when the price of gold increases, currencies and the purchasing power of said currencies decrease: hence inflation.
There is also the possibility that the unemployment and inflation indices have been politicized i.e. changes to the measures over time specifically underestimate both in order to make elected federal officials look good.
What does this all mean? Inflation as opposed to being a headline is more of a silent killer, shall we say the diabetes of the economy.
With wages and salaries flat or declining and essentials costing more, people cannot keep up with the cost of living. In fact, Cost of Living (COL) is rarely reported these days. Taxes are also flat or increasing. The price of commodities are going up. People, thus, are either saving less or eating into their savings simply to live. If we do not do something, inflation will be the silent killer of our economy in the next ten years. There were predictions at the onset of the Great Recession that the United States would become more like a European country. The question now is whether we are going to be more like the UK, Italy, or maybe even Spain.
What should we do?
First and foremost, we need to continue the policies of the Fed to keep the economy moving along. If this is all we do, then we will run into terrible inflationary problems, much worse than we are experiencing today. That is why secondly, we need to overhaul our tax structure to generate real growth. We need to relieve the tax burden of the average American. We need to create real tax incentives to grow the economy. We hear over and over again that the Fed is out of options. Therefore, it is up to Congress to come together and seriously address our tax structure.
One might say that the Fed has been providing inducements since the onset of the Great Recession. The inducements have worked partially. Corporate performance has improved but not enough meaningful jobs have been created and certainly wages have not gone up. The kind of tax restructuring required is different. Companies must be incentivated to invest in ways that create jobs in this country. The average citizen also needs to keep a bit more of their hard earned money. These tax cuts will require smaller budgets at all levels of government if this is going to work.
We should keep individual taxes at the level of the Bush tax cut. We must also consider cutting corporate taxes tied to developing innovative new products and services that increase the manufacturing base in the US. Providing more taxes to corporations to support employee benefits. We also need to make the U.S. a business friendly location for foreign companies as well. We need to create a situation in which money does not flee the United States to avoid taxes but flows here to invest. These kinds of changes in the tax laws will drive growth.
This will require our government to work more effectively than it has in years. We cannot spend our way out of this situation nor can we save our way out. We can judiciously do some of both and steer our way to a more stable and growing economy.
Inflation has been a concern no matter what side of the aisle you are on. It does not discriminate! Two political opposites vehemently agree on this:
"The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation." ~ Vladimir Lenin
Politicians of America, something must be done. This is not about political ego. This is about avoiding financial extinction.