There’s been a lot of talk and almost constant storylines in the media about inflation. Is inflation here to stay? Is it transitory? What will the Fed do with rates?
Let’s take a step back to some more fundamental economics. For Milton Friedman, inflation was never a cost-push, demand-pull or the effect of a rate increase, but a national phenomenon produced by monetary policy. Friedman concluded that inflation was always produced by high public spending and a growth in money supply.
Here’s an example… when a company issues stock, it devalues the other shares outstanding. The company makes each existing share of stock worth less by the amount of new stock issued. This applies directly with the amount of currency a government puts in circulation- an increase in the amount of dollars in circulation makes each dollar worth less.
Another example… news outlets report that rising labor costs adds to inflation. In reality, rising wages are a symptom of inflation. A rise in costs like food prices, rent, and transportation are the result of each dollar in circulation being worth less. As a result of the pinch of lower purchasing power, workers demand higher wages in order to pay for their increased cost of living.
Among the thousands of products that go up in price from the decrease in the purchasing power of the dollar, there are some supply/demand issues that temporarily influence prices. New and used car prices have recently risen from the shortage, coupled by the increased demand, in semiconductor chips. The average new car price today is $40,000. Ten years ago it was $28,000. In 2000 it was $21.800 and in 1990 it was $15,500. You get the picture. Pick any product and it is much more expensive every decade from the increase in dollars in circulation- just take a look at the graph above.
An increase in money supply = an increase in the amount of currency in circulation = a loss of purchasing power = inflation. Simple as that.
Milton Friedman coined the phrase ”inflation – the hidden tax”. Unless you constantly receive a wage increase, you can never keep up with inflation. It really is the hidden tax. Who is behind this dastardly destruction of our currency? We will discuss this and reveal the culprit (culprits) in future posts.
Enjoy this snip of an interview with Martin Bergin on the topic of inflation conducted in the Today’s Market Explained (TME) podcast, as well as a link to the entire interview. Enjoy the listen!
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