The Weight of the Tax Called Inflation

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“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output...” —Milton Friedman

“Inflation is taxation without legislation.” —Milton Friedman

Prices Have Been Increasing for Two Years

The Great Financial Recession was met with furious monetary and fiscal stimulus to blunt its impact. Likewise, the pandemic brought more of the same, and all of this had in common a four-letter word: debt. Flooding the economy with liquidity resulted finally in inflation that crept close to double digits before slowly coming down to around 3 percent today. In fact, the U.S. central bank is proud to announce it has essentially “licked” inflation.

Prices fell in June this year for the first time in almost two years. The headline Consumer Price Index (CPI) declined by 0.1 percent month over month, for the first drop in 23 months, according to the U.S. Bureau of Labor Statistics. Economists forecast inflation to increase by 0.1 percent compared with May. On an annual basis, the CPI rose 3.0 percent in June—down from 3.4 percent the prior month—to beat estimates for a 3.1 percent gain.

But wait just a darned minute. Until prices come down, don’t we have prices that over the period from 2022–24 jumped on average 20 percent? Rents. Vehicles. Food. Insurance. Just a couple months ago, my six-month auto insurance premium leaped from $600 to $900—a 50 percent increase!

(Source: U.S. Bureau of Labor Statistics Release: Consumer Price Index / Units: Index 1982-1984=100; seasonally adjusted)

Wages increased during this time as well, but not enough to offset inflation.

(Source: Federal Reserve Bank of Atlanta Release: Wage Growth Tracker / Units: Percent change from year ago; not seasonally adjusted)

Multiple Impacts of Inflation on Individuals and Families

Inflation has significant, deleterious effects on people, impacting individuals and businesses. It reduces the value of money over time, making it harder for consumers to buy the same goods and services. As prices rise, purchasing power decreases, impacting everyone, but especially those in low-income households who must use all their earnings simply to survive.

Most U.S. adults report price increases are causing financial hardship for their households. Some describe it as severe, affecting their ability to maintain their standard of living. Rising prices lead to household belt-tightening. People may cut back on discretionary spending, savings, and non-essential items due to higher costs for essentials like food, utilities, and gasoline.

Inflation prompts central banks (like the Federal Reserve) to raise interest rates to control it. This affects borrowing costs so those who need more money and do so through loans and credit cards are seeing the inflation impact made even worse through higher interest rates.

(Source U.S. Bureau of Labor Statistics)

Two-Thirds of Americans Are Now Struggling Financially

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens,”  said John Maynard Keynes. And all that debt we talked about earlier? Taxpayers are on the hook for $35 trillion in national debt, a level rivaling the debt in times of world wars. If today inflation means it takes $1.20 to buy what used to require only $1.00 two years ago, the real financial burden of the $35 trillion in national debt is now about only $29 trillion. Yes, inflation also reduces the real cost of debt. That is the result of currency devaluation. Punishes savers and those on fixed incomes while rewarding debtors.

Three national polls done in 2024 found nearly two-thirds of Americans said they are living paycheck to paycheck. That means 66 percent said they spend as much as they earn each month, making it difficult to save for the future, according to a MarketWatch Guides survey.

Nearly four in 10 (39 percent) of U.S. adults say they worry most of the time that their family income won’t cover their expenses, according to a recent CNN poll. That’s up from 28 percent in December 2021 and looks much like the numbers seen during the Great Recession (37 percent). The U.S. government sought to prevent recession by using excessive debt to accomplish that end. Now the bills are coming due, and the debt must be serviced and reduced.

Examples of Food Prices That Have Skyrocketed These Past Two Years

• Breakfast cereal—Shoppers regularly complain about the increasing price of cereal, especially the higher-end brand products.
• Bacon—Pork prices have increased due to reduced availability. All cuts of meat have gone up, but bacon lovers have been hit severely.
• Butter—The price of butter rose so much that stores had to put security tags on specific branded packs. Non-branded butter is more cost-effective, but prices are still rising, as many turn to cheaper, alternative spreads.
• Olive oil—Like butter, olive oil prices have skyrocketed, putting even the essential brands beyond the reach of most households.
• Vegan—Plant-based substitutes such as vegan bacon was once the answer to increasing meat prices. Veggie options can be even more expensive than the meats they were targeted to replace because flavor enhancers and emulsifiers in the production process are keeping plant-based options high-priced.
• Eggs—Avian (bird) flu is a factor in rising egg prices, with some shoppers claiming to pay increases of more than 200 percent compared to last year. Inflation, sure, but bird shortages are part and parcel to the problem as well.
• Pet food—It just may be that your pet detests store-branded food. Premium pet food brands have increased significantly, however. Likewise, cat litter has become expensive.
• Beef—Prices rose 16 percent in the year following the pandemic, so high that security tags are used on the more expensive cuts. Steaks have become a luxury beyond the budget of the average American family.
• Citrus fruits—These are up around 20 percent. Grapes are much more expensive. Likewise orange juice.
• Yogurt—A small single serving yogurt that used to be $2 is $4 today.
• Coffee—I cascaded from Starbucks to my own Peets brand coffee I brewed myself to Kirkland drip—and even the Costco coffee brand seems expensive. Hot dogs are up too unless you want the $1.50 hot dog at Costco. That and the $4.99 roasted chicken are great deals!

During the Great Depression, our great-grandparents became creative when many jobs and even homes, were lost. From soup kitchens to glorious Victory Vegetable gardens austerity became the most cherished virtue in the 1930s. Perhaps almost a century later we need to adopt and inculcate some of those same frugal habits, spending as little as possible just so we can survive.

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