GUEST POST from Don: Inflation

UNDERSTANDING INFLATION

I have found few who understand what recent years of high inflation have done to the next generation as well as our own.

Rule # 1:  INFLATION HURTS EVERYONE.

There are few who gain from it.  The raw materials provider gets screwed.  Often that company has to find ways to cut expenses.  That means they don’t buy new equipment when they should.  Which means that the equipment manufacturers have fewer sales.  

It goes right down the line.  Every company in the process, including the hard-working truckers and retail store owners lose revenue (or the value of their revenue).

Although everyone suffers, the poor and middle class suffer most.  Those on fixed incomes get hurt.  Annuities, stock distributions, and pension benefits don’t rise with inflation.  

It isn’t only the inflation, it is also the loss of employment for the poor and young, and higher interest rates for buying a car or house.

Rule # 2:  RAISING THE PRICE DOESN’T HELP MUCH, BUT MUST HAPPEN.

Retailers have a hard time making a profit when there’s high inflation.  There is a truism:  ‘When you raise the price fewer will buy.’  Another is ‘Tax what you want less of.’  Both true.  With increased cost there are fewer buyers.  So raising prices really doesn’t help the profit margin as much as some might imagine.  What do you think happens when sales decline?  Only two options: cut overhead costs or raise prices again.  This is the problem that fast food joints and pharmacies now have .  There is little they can do to reduce overhead except cut employee hours.    

Inflation starts a downward spiral in sales and employee hours.  Fewer workers means poorer customer service and fewer sales again.

Rule #3:  INFLATION IS CUMULATIVE.

I can’t emphasize this enough.  Even if next year’s inflation number is only 2% it does not erase the 9% inflation of a few years ago.  It builds on it.  The 9% inflation year is a BAD GIFT that keeps on taking.

Take a quick look at the chart above.  Inflation charts all look like this…and they are all wrong.  This chart implies that the 9% inflation has gone away.  Actually NONE of it has gone away.  The 9% inflation on the chart still affects you today and will for years to come.  Instead the chart should show the cumulative effect, with the line going up, up, up ALWAYS UP (either faster or slower).  Prices in general do not back down when inflation eases.  It is the new BASE from which all further increases in price come.

Two examples illustrate…
a. Inflation for 4 years of 3.2% per year…  An item costs $10.  After four years = $11.34.  Cumulative inflation = 13.4%.
b. Inflation for 4 years of 5.4% per year…  An item costs $10.  After four years = $12.34.  Cumulative inflation = 23.4%.

The point?  It doesn’t take many years of higher inflation to take away an additional 10% of your buying power (example b).  Few get a 24% raise over 4 years.  Those touted $15 entry-level wages are meaningless if those workers were earning $12 only four years ago.  They can buy only the same number of candy bars as before.

**A larger inflation rate is bad news for MANY years to come.  It is hard to overcome a 9% inflation rate.  To overcome it there has to be an inflation rate lower than the average 3.2% for many years in a row.  In fact, it would take 29 years at a solid 3% to overcome that one year of 9%.  What I’m saying is that it isn’t going to happen.  Its cooked into our economy now.  So the cumulative inflation over the last 4 years of 25% is not going away.  Your wage increases cannot catch up to what that did to your spending power.**

Let’s be clear, some items are now less than a year ago … but a year ago they were priced super high.  So, almost every item that is “cheaper” is still much more expensive than 4 years ago.

Do you see now why I’m making such a big deal about this?  If we have another 4 years like these last 4 years we will become a much poorer nation.  Our focus won’t be on “how to get rich” but “how to survive.”

To quickly counter high cumulative inflation there is only a poor option called DEFLATION.  That sounds nice, but is usually the result of incredibly high unemployment and the inability to acquire loans.  Several countries have gone through this and it was painful.  Businesses closed right and left.  There was little money in circulation.  Home ownership rates dropped.  

WHAT WE NEED?

Long-term lower inflation rates below 3.5%.  Not deflation, but reasonable growth.  That would lower interest rates a point or two.  That would allow job formation.  That would allow us all to catch our breath and adjust our lifestyles to match the changes from the last four years.

HOW TO GET THAT?

Government must control its spending (spending above revenue causes inflationary pressures).  We know that national debt will continue to grow, but it should grow at less than half the current rate.

[PLEASE NOTE that Don is always open to discussing the thoughts and opinions he shares here and welcomes comments as shared in the comment section. He doesn’t use other social media platforms and won’t see whatever you’d like to share with him if you post it elsewhere.
ALSO, Don is always open to offer his thoughts on various topics. If you have a specific request, you can let him know in a comment; he reads – and replies to – them all. ~ Sherry]

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