Inflation: Subtle, Silent, Sophisticated Taxation
June 16, 2021
Price inflation in May 2021 was up 5% over May of 2020. At this pace, the general level of prices will double in less than 15 years. The last time inflation was running this high was in 2008, when gasoline first breached $4 a gallon. And inflation expectations for the next year have reached a record high.
But what did we expect when the government created trillions of dollars and forced people to stay home from work? The Federal Reserve's balance sheet has exploded by 100% to more than $8 trillion since last year; it was the perfect recipe for inflation with more money supplied than goods and services available to buy.
There have been red fags for months, with businesses announcing that they are raising prices.
Proctor & Gamble manufactures hundreds of products across dozens of brands from diapers to detergents. General Mills makes various foodstuffs from cereals to soups and pastries to pizzas. Hormel also sells various food products. Whirlpool manufactures appliances. Texas's own Kimberly-Clark makes tissues and paper towels, among other products. Tempur Sealy sells bedding.
Americans use or consume products from these businesses every day, and those companies are all raising their prices, which hurts consumers' purchasing power. Grocery stores and restaurants across the country have been raising prices as well.
But why these sudden price increases? Businesses are facing higher costs. Commodity prices are climbing quickly, as are wages due to labor shortages.
The contention that current inflation numbers are skewed because of “base-effects” from the early months of the pandemic is incomplete. The consumer price index (CPI) in May 2020 (the lowest point of pandemic-era prices) was just 1% below the CPI's then-record high in February 2020, which has been eclipsed since August 2020. So, the base-effects argument does not explain a 5% annual increase.
Inflation is a tax, pure and simple, but not an explicit tax. Instead, it robs you of your purchasing power subtly and silently so that most people are none the wiser. It is not accomplished expressly through legislation, but through the sophisticated maneuvers of the Fed, giving inflation an air of mystery.
In reality, there is nothing mysterious about inflation. When the Fed creates money faster than the economy grows, then prices will tend to rise. That is why there is also no end in sight to this inflationary wave. The Fed continues to target historically low interest rates by creating money every month at an annual pace of more than $1.4 trillion, far faster than the economy is growing. The result is real wealth being taken from you — taxation without representation.
Nevertheless, it is surprisingly easy to stop inflation.
Ending inflation only requires the Fed to cease flooding the economy with money. If the Fed slows its money creation, though, then Congress cannot use inflation to finance the nation's deficits, which seems to be Congress's favorite way to spend.
Conversely, if Congress were to achieve a balanced budget through sound fiscal policy, then the Fed could return to its original mission of price stability, and not worry about backstopping massive federal deficits with newly created money.
This could be more quickly be achieved by implementing the Texas Public Policy Foundation's Responsible American Budget, which sets a total budget limit at no more than the average taxpayer's ability to pay for it as measured by population growth plus inflation. While this would not completely solve the problem of inflation, a journey of a thousand miles begins with a single step, and this will point the country in the right direction.
We must not let the best be the enemy of the good; something must be done sooner rather than later to stop the current runaway spending in Congress.
For example: Senators in Congress have recently reached a tentative bipartisan “infrastructure” deal to spend another $579 billion without raising taxes — or more accurately, without explicitly raising taxes. The spending will be financed with bonds purchased by the Fed, which means through the implicit tax of inflation. That $579 billion will still be collected, but not through so obvious a mechanism as the IRS.
No, inflation is too subtle, silent, and sophisticated for that.