Despite progress over the last year, the United States economy continues to experience
inflation above the Federal Reserve’s targeted rate of 2%. That’s a lede that’s guaranteed to
bore many readers quickly, so let’s get right to why that’s important, and what needs to be
understood about the current state of inflation as we begin the summer of a Presidential
election year.
The lowering of the inflation rate does not bring prices down. It just means prices are going up
at a slower rate. Many of us look at prices that typically swing up and down as our gages of
inflation. We’re accustom to gas prices going up and feeling that as inflation, and coming down
and feeling a bit of relief.
Some are still rooting for deflation, when all prices come down. That’s an equal and opposite
problem to inflation. When people expect prices to be lower in the future, they put off their
purchases and wait. Our entire economy is built on consumption and investing. If people
believe there is a better deal coming, they won’t invest, and they’ll only consume the what they
must have and put off any discretionary purchases until prices drop.
This would stall our entire economy. Worse, those holding assets as investments – think
homeowners as the prime example – would begin to lose money on their nest eggs. Look back
at what happened between 2008 and 2010. Almost overnight housing went from a “must own”
investment to something no one wanted as prices entered a downward spiral.
Prices had begun to recover within a couple of years, but the market signal had already been
sent loud and clear. Those who supplied new housing – from bankers to builders and
developers - suddenly saw new risks and dramatically decreased supply of new homes to the
market. We’re still seeing the effects of this on the supply of housing a decade and a half later.
So how does this matter with how we’re discussing inflation as we get closer to voting in
November? It matters because we’re approaching this issue from a positon of economic
illiteracy with those who are not only consuming the message, but from too many who are
writing about it.
We’ve already covered one of the bigger problems, in that expectations are being set that
success means prices will come down. This would not only mean asset prices, but wage prices
too. That would be suboptimal. What we want and need are for prices to stabilize.
We then will have people claiming that the President doesn’t control inflation. The policies of
Washington, for which the President usually sets the tone, absolutely determine inflation - Even
more than the Federal Reserve.

Inflation happens when you have too many dollars chasing too few goods. We’ve been running
budget deficits consistently for the past quarter century, but since the pandemic we’ve
increased spending much faster than we’ve increased incoming tax receipts – and yes, the
amount of tax revenue the Federal Government is taking in is at record highs.
We don’t have a revenue problem. We have a spending problem.
This is bipartisan in its construct, and in the inaction to address it. Both sides blame the other
while continuing on the same path, undeterred. Each dollar printed in Washington makes
every dollar you hold worth less, and thus you need more of them to buy the same things.
A popular theme of blame I’m seeing from too many of my friends – even, if not especially
among the well-educated ones – is that we can’t have an inflation problem if corporations are
making record profits. This, again, projects blame onto “greedy corporations” without any
understanding of the underlying facts.
Inflation hits hardest among those who don’t own things, while it either rewards or at least
protects the wealth of those who do. This is why inflation must be feared in a stable society.
Inflation makes real wealth gaps even larger.
A corporation owns and sells assets or services. They produce these, sell them, and ideally keep
a percentage of the sales as a return on their risk and investment. If they make 10% on sale,
and still make 10% after a bout of inflation, they’re going to make record profits because the
money we’re measuring with is worth less, not because the corporation is making more.
Attacking corporations for making profits is the wrong way to combat inflation. If they make
less in real terms, they’re going to invest less, and thus employ fewer. That would be another
version of the downward spiral similar to and with equal results of deflation. The end is a
smaller economy, not a better one.
We need to beat inflation. We also need to fight the real problem, and understand what
victory does and does not look like.
Victory can only be assured with a balanced federal budget. Everything else is either blame
game or window dressing.