Inflation 2021

 

The other day my wife came home with some shocking news. She had been to the supermarket where she found that the price of Shredded Wheat,  the cereal that I have every day for breakfast, had risen to $4.00 a box. For as long as she could remember, it had been about $3.20 a box. The eighty-cent increase might not seem like much, but it is actually an increase of 25%.

 

What could have caused such a dramatic increase? The box and its contents have not changed. I don’t think that there has been a substantial increase  in demand that would cause the producer to jack up prices since Shredded Wheat  does not fly off the shelves like Cheerios.

 

Some think that supply issues might be the cause. Shipping and transportation tie-ups are in the headlines. Nevertheless, the increase in price of my favorite cereal would seem to be due to inflation. My wife tells me that everything has gone up in price in the supermarket.

 

Recent news items confirm my wife’s observations and indicate that inflation is indeed with us. Gasoline prices have risen sharply at the pump, and there is even talk that Social Security benefits will increase next year by about 6%. These increases are signs of inflation, but they are not the cause of inflation.

 

Another way to look at price inflation is to realize that it is not the value of particular products or services that has gone up, but that the value of the dollars we use to buy them has gone down. In the case of Shredded Wheat, it now takes four pieces of paper rather than three to buy a box.

 

Fifty-five years ago, we bought our first home in Fairfield for $20000. It was a modest home in a nice neighborhood. Eleven years later, the increasing size of our family led us to sell it for over  $60000, more than triple what we paid for it. Today, it is worth about $600000. The neighborhood is about the same, and even though succeeding owners have made some improvements; it is basically the same house.  The value of a dollar has so shrunk in the past 65 years that it now takes 600000 of them  rather than 20000 to own that home.

 

Economists disagree over the causes of inflation, but there is obviously a monetary component. A substantial increase in the supply of any commodity, whether it is coffee or oil, will inevitably cause its price to drop. Why shouldn’t the value of our currency decline, if the government substantially increases the printing of money, especially if it is deeply in debt to begin with?

 

The stimulus checks we received during the pandemic put dollars in our pockets, but the dollars we received were obviously a factor in the inflation we are now experiencing. After all, the Federal government did not have the stimulus money in some kind of rainy-day account. It had to print and borrow. In a way, it is like those people who max out their credit card, and then use another one to pay it off.  Instead of looking to the Federal government to deal with inflation, we should realize that our government  is largely the cause of rising prices.

 

The new multi-Trillion spending package that Democratic and Progressive politicians are trying to push through Congress will inevitably lead not only to higher taxes, but also to more inflation. Whatever the size of the final package, only a small percentage will go to real infrastructure improvements.

 

 A greater amount will certainly go to shoring up the almost bankrupt pension funds of Blue states whose Democratic politicians have based their careers on pandering to the demands of public service unions, their main source of political contributions. Injecting billions of dollars in these pension funds may avoid bankruptcy but the resulting inflation will eventually erode the spending power of the actual pensions these retirees receive. 

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Note: Here is assessment of inflation by Henry Hazlitt whose 1946 book, Economics in One Lesson, is a revered classic. It was revised and updated in 1979.

 

Inflation itself is a form or taxation, which usually bears hardest on those least able to pay. On the assumption that inflation affected everyone and everything evenly (which, we have seen, is never true), it would be tantamount to a flat sales tax of the same percentage on all commodities, with the rate as high on bread and milk as on diamonds and furs. Or it might be thought of as equivalent to a flat tax of the same percentage, without exemptions, on everyone’s income. It is a tax not only on every individuals expenditures, but on his savings account and life insurance. It is, in fact, a flat capital levy, without exemptions, in which the poor man pays as high a percentage as the rich man. (p. 176)