Inflation Is a Lie

When media pundits and politicians talk about inflation, they are almost always lying to you. They use the word one way when discussing the problem, and a very different way when discussing the solution. Inflation is a technical term that refers to the decreasing value of a currency relative to goods and services. It hurts people who have wealth in assets that are denominated in that currency, and can have distorting effects across markets due to menu costs, or the cost of changing the price of a good or service. Examples of this include the cost of printing new menus in a restaurant or the frictional costs of changing jobs for workers.

This phenomenon, which is ultimately governed by the money supply, is not the cause of what we have grown accustomed to calling inflation. When listening to the media or politicians, they will talk about inflation as an increase in the cost of everyday goods. This is only a problem for average workers, people who typically have relatively little in dollar-denominated assets like bonds. The actual problem is an increase in prices relative to wages, that is, the real cost.

The advertised rate of inflation is almost meaningless. How you measure inflation is only useful when comparing the relative price levels of different types of goods over time, especially when comparing goods to labor. The standard inflation metrics are developed against a basket of typical consumer goods. This basket changes as the typical consumer goods demanded change. I prefer to compare against hourly wages or annual family income, depending on the type of analysis. The first has the deficiency of not accounting for hours worked per year, and the second has a notable shortcoming of not accounting for labor that went from unpaid DIY to paid labor that replaced it. For example, a mother taking care of her child at home who begins working and now has to pay for childcare.

Relative to wages, most of the important facets of life have gotten far more expensive: housing, transportation, education, healthcare, and childcare. This is the root of affordability and why people feel they are struggling.

But this is not inflation! We have had real inflation; the dollar truly is less valuable than it once was, but it has not caused, nor been caused by, the mechanisms that have caused the affordability crisis. Inflation has been caused by the Federal Reserve’s attempts to keep interest rates at artificially low levels and, in doing so, increasing the money supply. That is what causes inflation, nothing else.

When media pundits talk about inflation, they speak of the affordability crisis, but when talking about solutions, they discuss the actual Monetary Policy methods by which a central bank can reduce inflation. It’s a solution to a completely different problem, and as such, when the inflation rate is fixed, the affordability problems people feel aren’t fixed.

In my opinion, we don’t need inflation. I believe that it is a hidden tax on the poor, who, because of their conditions, are forced to have a higher proportion of their wealth in cash at any given time, while allowing the wealthy access to mechanisms like Treasury bonds that make a premium slightly greater than inflation (for now) to avoid their wealth inflating away. The solutions to the affordability crisis are detailed in other articles, so I will not belabor them here. The point: Inflation and affordability are different issues that the powerful use to confuse and distract from the real issues plaguing the American public.