If you have turned on a television in the last two months you have probably heard the word inflation being mentioned. Inflation is basically a tax on the poor. These small but steady increases are making it harder for those that live paycheck to paycheck to get by. Yet, there is a way to make inflation work in your favor. That is why it is so important to have a financial education, so you can really understand how inflation works.
What is Inflation?
Inflation is the decline of purchasing power of a given currency over time. We have all seen this in our daily lives with rent prices, gas prices, grocery prices, and energy prices to name a few. While wages are going up as well, they just aren’t keeping up with the inflation on the cost of goods.
Why Doesn’t The Government Stop Inflation?
At the End of August, Fed Chairman Jerome Powell announced the central bank will allow inflation to run higher than the standard 2%. In summary, the FED has decided to let inflation rise more than it normally would and won’t be putting in any measures to stop it, like upping interest rates, in the near future.
So why isn’t the federal government worried about this inflation? Well, it all comes back to the debt we are in and the fact that we are the reserve currency. Countries all over the world, specifically in the US, are in growing amounts of debt. This debt is truly unable to be paid back in today’s dollars.
However, these loans we owe to other countries can be paid back much easier if our currency is inflated. The government pays back debt through taxes and the tax collected does increase with inflation because people are making more money, even if that additional money doesn’t buy them additional goods.
For example, if we owe Japan 100 million dollars and we inflate our currency 4% we now have that same amount of currency equalling 104 million dollars and yet our balance is still 100 million owed to Japan. We basically created an additional 4 million dollars to pay back our debt out of thin air.
Always remember, inflation actually helps those that hold fixed debt and penalizes those that are saving money. This includes the government and it includes you as well. The government can shrink the mountain of debt weighing down the US economy with inflation and you can do the same if you have fixed-rate debt. Inflation doesn’t care if you are the government or an individual.
This all starts to make sense now that the US Central Bank recently announced a more relaxed view on inflation. It is probable the FED doesn’t want to fight off inflation any longer, and inflation will soon be going up even higher, to reduce our current public debt and deficit, just like they did once before in 1946.
Inflation Hurts Savers
Each month most of you happily place your money in a savings account. On the surface, it appears you are making the right financial decision, but if your savings account is earning you 2% and inflation is at 4% you are actually losing money each and every month. Inflation is an important thing to understand as it pertains to your financial future. The truth is, you are either moving forward or backward financially and the decisions you make now will have a major impact on your net worth moving forward.