The Price of Inflation

The Price of Inflation

Bush is using inflation to pay off the deficits incurred by his Administration, leaving future generations with more problems than just debt.

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It is not a zoo story nor a jungle story nor a circus story, but you would not know it from the way the media deals with the monthly inflation rate numbers. Inflation is presented as a tigerish beast to be handled with a whip and chair.

Maybe because they think the subject is innately boring or maybe because they are prone to spiking their drinks, business journalists routinely use force-of-nature or invading-enemy expressions when they speak of inflation. It’s “inflation was held at bay this month” or “inflation was checked this month” or “new figures show inflation was contained again last month” or “inflation receded or surged this month.”

Inflation is not a wild animal out there, wherever out there is, looking to pounce. Nor is it a meteorological phenomenon like Hurricane Katrina. Like money itself, inflation is man-made. It does not wax or wane month to month according to the phases of the moon.

Month-to-month inflation numbers don’t mean too much anyway. Minute by minute, day by day and week by week prices go up and prices go down, and as they do, the inflation number jiggles along with them. A month is too short a time to tell whether inflation, defined as the general level of all prices, is trending upwards or if it’s just another jiggle. Quarterly or annual inflation numbers are another thing. They tell us what is happening.

At the moment what is happening is not good. Compared to what things cost last year, the general price level has gone up. To use one of those wild nature similes, inflation may not be rising as fast as a bat out of hell, but it is gaining altitude fast enough to wreak havoc with your nest egg.

From 2005 to 2006 the dollar in your purse lost 4 percent of its purchasing power. So unless you got a 4 percent raise to compensate, you are working for less than you were a year ago.

A 4 percent rate may not sound like much, but thanks to the “miracle of compound interest,” it can postpone your retirement or keep you on the job till you drop dead. It makes the difference between going to a four-year college or a two-year community institution or even no college at all. It can play hob with your health savings account. In ten years a 4 percent inflation rate will wipe out almost half the value of your savings.

There is a big plus side to inflation if you are in debt. Suppose that you overpaid for your house: In ten years, the value of your mortgage will have been cut in half. What holds for private debt holds for public debt, too. Should inflation stay at the present rate or go higher, the gigantic deficits incurred by George Bush will not, after all, have to be paid off by our grandchildren as they keep warning us will happen. The deficits will disappear in a flood tide of cheap money.

The reason is that a dollar borrowed now, if paid back after fifteen years, will be worth about 40 cents. Because employers understand how compound interest shrinks the buying power of a dollar so quickly, you have to hold a gun to their heads to get them to agree to cost-of-living increases. The same knowledge prompts Republicans to do all in their power to decouple Social Security payments from their annual cost of living adjustment.

From time immemorial, inflation is how governments have wiggled out of repaying what they owe. Back in the days when all money was copper, silver or gold, its purchasing power was lessened by minting coins with less precious metal in them. Next came printing more dollar bills. Nowadays debasing the currency is accomplished by a few computer keystrokes.

Economists and finance big shots will sometimes talk about “an acceptable level of inflation.” They do not discuss who decides what that level might be. Since inflation, depending on how bad it is, always attacks savings, frustrates financial and personal planning, causes sky-high interest rates, lowered investment, unemployment, recession and, if it’s bad enough and goes on long enough, chaos, panic, despair and social disintegration, how can it ever be acceptable?

It was as predictable as spring following winter that the Bush deficits would be followed by the Bush inflation to pay for them. It’s his appointees on the Federal Reserve Board and the Treasury Department you may blame. No beasts, no storms, no earthquakes or any other act of nature. When you see your money evaporating in front of your eyes, don’t call the weather bureau. Call the politicians.

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