Inflation: A Hidden Tax

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Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. Its a “hidden tax” on your money.

Inflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets.

Conversely, the same American’s paycheck covers less monthly goods, services, bills and debt payments. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power, concludes the nonpartisan Tax Foundation.

Simply, inflation occurs when there is more money for the same amount of real goods and services, which forces an increase in prices.

The way this occurs is when policymakers put more money into the economy, through either deficit-financed government spending or Federal Reserve loose monetary action, both actions can result in an increase in the money supply of an economy.

A Hidden Tax.

This means that if any other type of tax has to be levied on the general population, it must be introduced in and approved by Congress or legislatures. However, this is not the case with the “hidden tax” of inflation.

Inflation tax is not an actual statuary tax paid to a government; instead “inflation tax” refers to the penalty incurred to purchasing power for the money you’re holding at a time of high inflation.

“Inflation is the one form of taxation that can be imposed without legislation.” ~ Milton Friedman

Inflation is an extremely destructive hidden tax, especially on working families. Inflation reduces the buying power of money. Put simply, high inflation means your money is not stretching as far as it once did. As prices rises, it is felt because wages and benefits are not rising in equal measures.

References:

  1. https://debtinflation.com/why-is-inflation-a-tax/
  2. https://taxfoundation.org/tax-basics/inflation/

“Taxes now impose a greater burden on the average American household than the combined cost of food, clothing, education, and health care.”

Will Higher Interest Rates Tame Inflation?

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Interest rates don’t determine inflation; the amount of money circulating in the economy determines inflation.  At this point, there are over $5 trillion in excess money in the system. Brian Wesbury

While inflation roars at its highest level in four decades, President Joe Biden tried to downplay skyrocketing inflation, insisting it was only up “just an inch” in the short term.

“Well, first of all, let’s put this in perspective. Inflation rate month to month was just– just an inch, hardly at all,” President Joe Biden on Sixty Minutes

Despite the fact that consumer prices rose in August by one-tenth of a percentage point to 8.3 percent, economists had expected inflation to go down. Additionally, median inflation hit the highest level ever recorded.

The median CPI, which excludes all the large changes in either direction and is better predicted by labor market slack, is extremely ugly at 9.2% annual rate in August, the single highest monthly print in their dataset which starts in 1983 (second highest was in June).

The Federal Reserve has been raising interest rates since March to slow the economy in a bid to tame America’s worst bout of inflation in four decades. However, the data suggested that their efforts have not yet had much of an effect.

The Federal Reserve raising interest rates may reduce economic growth, make capital more expensive and may throw the US economy into recession, however there is no guarantee that these actions will tame or fix inflation, opines Brian Wesbury, Chief Economist, First Trust Advisors L. P. Interest rates, supply disruptions or Russian’s war in Ukraine don’t determine inflation; the amount of money circulating in the economy determines inflation.  

“Inflation is always and everywhere a monetary phenomenon.” ~ Milton Friedman

The Fed’s balance sheet held $850 billion in reserves at the end of 2007.  Today, the balance sheet is close to $9 trillion.  Most of these deposits at the Fed are bank reserves which the Fed created by buying Treasury bonds, much of which was money the Treasury itself handed out during the pandemic.  At this point, there are over $5 trillion in excess money in the system.

Technically, banks can do whatever they want with these reserves as long as they meet the capital and liquidity ratio requirements set by regulators.

  • They can hold them at the Fed and get the interest rate the Fed sets, or
  • They can lend them out at current market interest rates.  

In turn, the big question is whether the Fed can pay banks enough to stop them from lending in the private marketplace and multiplying the money supply.

The Fed has never tried to stop bank lending in an inflationary environment by just raising the interest rate on excess reserves (IOER). Moreover, the Fed is now losing money on much of its bond portfolio because it bought so many bonds at low interest rates. At some point the Fed will be paying out more in interest than it is earning on its securities.

Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today.

References:

  1. https://www.ftportfolios.com/Commentary/EconomicResearch/2022/9/19/will-higher-interest-rates-tame-inflation
  2. https://www.breitbart.com/economy/2022/09/13/underlying-inflation-reaches-scorching-new-record-high/

“Taxes now impose a greater burden on the average American household than the combined cost of food, clothing, education, and health care.”

How to Protect Your Money from Inflation

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Inflation causes your money to be worth less over time. To hedge against inflation, you need to invest your money in assets.

Inflation in the U.S. is at the highest rate in four decades.

Inflation decreases the purchasing power of your dollars over time. Here are steps you can take to protect the purchasing power of your dollars, according to Forbes.

  • Trim your expenses. To minimize the impact of inflation, review your spending and identify areas to reduce or eliminate completely.
  • Wait to pay off low-interest debt. Paying off debt is usually good, but you may want to hold off on making extra payments if you have low-interest debt. Your debt becomes less expensive due to inflation. Use the money for other purposes—like paying off higher-interest loans.
  • Invest your money. Inflation causes your savings to be worth less over time. To hedge against inflation, you need to invest your money. If the prospect of investing is scary, consider a diversified portfolio of broad market index funds to lower your risk levels and costs.

Getting inflation under control

The Federal Reserve is tasked with keeping inflation at a healthy level by adjusting the nation’s money supply and interest rates.

When the economy is expanding too quickly and inflation rises, the Fed will typically raise interest rates or sell assets to reduce the amount of cash in circulation. These actions tend to reduce demand within the economy and can push the economy into recession.

References:

  1. https://www.forbes.com/advisor/investing/is-inflation-good-or-bad/

Social Security Retirement Benefits

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Social Security can be one of the most important parts of your retirement, and deciding when to claim is a big decision. The amount of your benefit will depend on your average income over your working years, your spouse’s average income and the age at which you claim benefits. AARP

Signed into law in 1935, the U.S. Social Security program replaces a percentage of your pre-retirement income based on your lifetime earnings. Traditionally, the retirement system in the U.S. has been a three-legged stool: Social Security, personal savings and investments, and pensions. Social Security was never intended to be the sole source of income for retirement.

Traditionally, the retirement system in the U.S. has been a three-legged stool: Social Security, savings and investments, and pensions.

The portion of your pre-retirement wages that Social Security replaces is based on your highest 35 years of earnings and varies depending on how much you earn and when you choose to start benefits.

When you work and pay Social Security taxes, you earn “credits” toward Social Security benefits. The number of credits you need to get retirement benefits is 40 credits (usually, this is 10 years of work). Social Security Administration (SSA) uses the tax money to pay benefits to:

  • People who have already retired.
  • People who are disabled.
  • Survivors of workers who have died.
  • Dependents of beneficiaries.

Social Security is funded primarily through a payroll tax. The current tax rate for Social Security is 6.2 percent for the employer and 6.2 percent for the employee — 12.4 percent total. If you’re self-employed, you have to pay the entire amount. The government collects Social Security tax on wages up to $147,000 in 2022.

SSA uses these payroll taxes to pay people who are currently receiving benefits. Any unused money goes to the Social Security trust fund that pays monthly benefits to you and your family when you start receiving retirement benefits.

The amount of the Social Security benefits you or your family receives depends on the amount of earnings shown on your record and when you decide to receive benefits.

SSA bases your benefit payment on how much you earned during your working career. Higher lifetime earnings result in higher benefits. If there were some years you didn’t work or had low earnings, your benefit amount may be lower than if you had worked steadily.

The age at which you decide to retire also affects your benefit. If you retire at age 62, the earliest possible Social Security retirement age, your benefit will be lower than if you wait.

Social Security retirement benefits were not intended to be enough to fully fund retirement – the average Social Security retirement benefit is just over $1,231.

Children’s benefits

Your dependent child may get benefits on your earnings record when you start your Social Security retirement benefits. Your child may get up to half of your full benefit.

To get benefits, your child must be unmarried and one of the following:

  • Younger than age 18.
  • 18-19 years old and a full-time student (no higher than grade 12).
  • 18 or older and developed a qualifying disability before age 22.

Your benefits may be taxable

About 40% of people who get Social Security have to pay income taxes on their benefits, according to SSA. For example:

  • If you file a federal tax return as an “individual,” and your combined income is between $25,000 and $34,000, you may have to pay taxes on up to 50% of your Social Security benefits. If your combined income is more than $34,000, up to 85% of your Social Security benefits is subject to income tax.
  • If you file a joint return, you may have to pay taxes on 50% of your benefits if you and your spouse have a combined income between $32,000 and $44,000. If your combined income is more than $44,000, up to 85% of your Social Security benefits is subject to income tax.
  • If you’re married and file a separate return, you’ll probably pay taxes on your benefits.

At the end of each year, SSA will send you a Social Security Benefit Statement (Form SSA-1099) showing the amount of benefits you received. This statement can be used when you complete your federal income tax return to determine if you must pay taxes on your benefits.

References:

  1. https://www.ssa.gov/benefits/retirement/learn.html#h1
  2. https://www.ssa.gov/pubs/EN-05-10035.pdf
  3. https://www.aarp.org/retirement/social-security/benefits-calculator/

Note: If you enrolled in Social Security early, you’ll automatically be enrolled in Medicare at 65. But if you haven’t signed up for Social Security, then you need to take steps to enroll in Medicare.

You have a seven-month window to sign up for Medicare — the three months before your birthday, your birthday month and three months afterwards.

Federal Reserve Balance Sheet and Inflation

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The U.S. Federal Reserve’s balance sheet consists of the Fed’s portfolio of U.S. Treasury and government-guaranteed mortgage-backed securities (MBS).

The balance sheet is one of the Federal Reserve’s main instruments for conducting monetary policy and for fulfilling the Federal Reserve’s dual mandate that requires it to ensure both stable prices and maximum employment.

The traditional tool the Fed used to accomplish these goals was the adjustment of the federal funds rate, the short-term interest rate that determined how much it costs for banks to lend to each other overnight.

The 2007-2008 financial crisis, however, demonstrated that even lowering the interest rate to zero was considered insufficient to shore up economies in freefall, and the Fed turned to more unusual tactics.

One of these measures was what the Fed refers to as “large-scale asset purchases,” which is more commonly known as “quantitative easing.” Just as with any other firm, securities that the Fed purchases through quantitative easing are considered assets and therefore are represented on the Fed’s balance sheet.

The value of the balance sheet of the Federal Reserve increased overall since 2007, when it stood at roughly $0.9 trillion U.S. dollars.

As of September 6, 2022, the Federal Reserve had $8.82 trillion U.S. dollars of assets on its balance sheet.

This dramatic increase can be traced back to two black swan events that had a disastrous impact on the U.S. economy:

  • the 2008 financial crisis and
  • the COVID-19 pandemic,

Both events led to a negative annual growth of the real gross domestic product (GDP) of the United States, writes Thomas Wade is the Director of Financial Services Policy at the American Action Forum. Therefore, the Federal Reserve’s response to these crises was to adopt expansionary monetary policies to stimulate employment and economic growth.

Increasing the money supply — an expansionary monetary policies which intends to increase the amount of money circulating in the economy — tends to increase inflation, states Statista.com, which destabilizes the economy and erodes purchasing power. Currently, the inflation rate in the United States reached 8.5 percent in 2022, the largest value in four decades.

Bottomline is that by expanding its balance sheet—i.e., by buying government bonds and MBS—the Fed expands the nation’s money supply in the hope of lowering interest rates and stimulating the economy; contracting the balance sheet should have the opposite effect.

However, by expanding the money supply too much, the Fed ran the risk of igniting inflation [“Inflation is one form of taxation that can be imposed without legislation.” Milton Friedman], while overly contracting it may stifle economic activity, including increasing unemployment and triggering an economic recession.

Inflation’, quipped Milton Friedman, ‘is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.

Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today.

References:

  1. https://www.statista.com/statistics/1121448/fed-balance-sheet-timeline
  2. https://www.americanactionforum.org/insight/tracker-the-federal-reserves-balance-sheet/#ixzz7esb8x4vu
  3. https://www.fxcm.com/markets/insights/federal-reserve-balance-sheet/

Social Security cost of living for 2023 could increase 8.7%

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Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. New York Times

More than 70 million Americans receiving Social Security benefits could see the largest annual cost-of-living increase in more than four decades in 2023, considering the government CPI inflation data.

The Social Security Administration will announce the formal 2023 figure around October 13, after the release of September CPI inflation data. However, the August CPI point to a Social Security cost-of-living adjustment, known as the COLA, of 8.7 percent, according to an estimate by the Senior Citizens League that lobbies for seniors and reported by The New York Times.

The COLA is calculated annually using a formula detailed in federal law. It uses one of the broadest government measures of inflation, known as the Consumer Price Index for Urban Wage Earners and Clerical Workers‌, or CPI.‌

Social Security averages together the CPI figures during the third quarter of each year, and compares that with the previous year’s figure. For example, the 2023 COLA will be calculated by averaging together the CPI figures for the third quarter of 2022 and comparing that with the same averaged figures for 2021.

Rapid inflation typically results in trouble for equity stocks and the overall market. Financial risk assets have historically performed badly during periods of inflation, while tangible assets like real estate have held their value better.

References:

  1. https://www.nytimes.com/2022/09/14/business/social-security-cola-increase.html
  2. https://www.ssa.gov/
  3. https://www.whio.com/news/trending/social-security-boost-cost-of-living-increase-2023-pace-be-largest-since-1981/

Social Security is a program run by the federal government. The program works by using Social Security taxes paid into a trust fund to provide benefits to people who are eligible. Eligibility for Social Security retirement benefits starts at age 62 (the earliest you can receive them) to age 70 (when you hit your greatest amount).

Warren Buffett Investing Lessons

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“Most people get interested in stocks [or assets like Bitcoin] when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” – Warren Buffett

Warren Buffett, Chairman and CEO, Berkshire-Hathaway, the Oracle of Omaha, has been the most successful investor of the 20th Century and is considered by many to be one of the greatest investors of all time.. His investment track record is simply remarkable with compounded annual returns over 20% over the last 55 plus years.

Essentially, if you had invested $10,000 USD in his investment firm Berkshire-Hathaway in 1965, that $10,000 USD would today be worth over $280 million US dollars.

What follows are several investing lessons all investors can learn from Buffett:

Investing Lesson 1: Risk Comes From Not Knowing What You are Doing

Many first-time investors have started trading in stocks and cryptocurrency without really understanding how these asset classes work. Buffett has advised investors to not chase everything that is new and shiny, and instead to only focus on the opportunities that they painstakingly researched and understand.

Stick to your circle of competence. Try not to be good at all things, and instead try to be great at one thing and give it all you`ve got. It`s better to be known for one thing than nothing.

“Never invest in a business you cannot understand.” Warren Buffett.

Investing Lesson 2: System Overpowers the Smart

Buffett advises that retail investors use a low-cost index fund. Investing via index funds gives you the advantage of a system, it allows for a disciplined investing cycle via SIPs and keeps emotions away from corrupting that framework. In other words, Buffett wants retail investors to follow a system over everything else.

And the system and a clear investing framework finding great business at good reasonable prices that have powered Berkshire Hathaway for the last five decades.

Change the way you see setbacks. You will make mistakes, probably lots of them, as long as you choose to swing for the fences. Buffett believes you can do well if you program your mind to see opportunities in every setback.

“A low-cost index fund is the most sensible equity investment for the great majority of investors.” Warren Buffett.

Investing Lesson 3: Have an Owner’s Mindset

Buying a stock is effectively buying a business and investors should follow the same kind of rigorous analysis and due diligence as one would do when buying a business.

The lesson here is that instead of getting too caught up in the recent movement of the stock price, you should spend more time analyzing the business fundamentals behind the stock price.

You can only genuinely value a business if you can accurately predict future cash flows. This is impossible without an understanding of the company’s operating environment and fundamentals.

And once you have answers to the pertinent questions, invest in a business that you would like to own for the next 10 to 20 years.

On how to invest in stocks. His response is a simple five-word answer: “Invest in the long term.”

“That whole idea that you own a business you know is vital to the investment process.” Warren Buffett

Investing Lesson 4: Be Fearful When Others are Greedy and Be Greedy When Others are Fearful

The stock markets work in cycles of greed and fear. When there is greed, people are ready to pay more than what a business is worth. But when fear sets in, then great businesses are available at huge discounts for anyone who is ready to keep their gloomy emotions aside.

In Berkshire’s 2018 shareholder letter, Buffett wrote, “Seizing opportunities does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential.”

In other words, Buffett encourages investors to not follow the herd. And strip away emotions when making investment decisions, which is likely to open up more profitable opportunities.

“What investors need is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals.” Warren Buffett

Investing Lesson 5: Save and Preserve Capital for A Golden Rainy Day

Warren Buffett goes by the philosophy – hold onto your money when money is cheap and spend aggressively when money is expensive.

Financial expert criticized Buffett for holding onto billions of dollars in cash and not deploying it in stocks. But Buffett was saving all that cash to be used when companies come down from the then astronomical valuations to more reasonable prices.

“Every decade or so, dark clouds will fill the economic skies and they will briefly rain gold. When a downpour of that sort occurs. It is imperative that we rush outdoors carrying washtubs and not teaspoons.” Warren Buffett

Investing Lesson 6: Never Invest Just Because a Company is Cheap

A cheap business may be cheap for a very good reason, but may not be a profitable or favorable investment.

His investing approach is to look at a business’s competitive advantage, intangibles like brand value, cost superiority and its strong growth prospects.

This goes hand-in-hand with his Buffett’s first rule of investing is “don’t lose money.” His second rule is “never forget rule number one.” In short, investors should try to avoid significant losses at all costs, but avoiding all losses is impossible.

“It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” Warren Buffett

Investing Lesson 7: Time is The Friend of The Wonderful Business

Patience and time are important in investing and has investors can reap the benefits of compounding.

Additionally, “cash is king” and investors must avoid debt at all costs. Buffett has always had a strong net cash position. Cash gives optionality and means you’re unlikely to have to make hard decisions when the market becomes volatile and eventually turns.

Considering volatility, Buffett said, “There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions are not immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”

Buffett is not a fan of the kind of debt that can leave consumers broke and helpless, especially when the markets go down.

“It is insane to risk what you have and need in order to obtain what you don’t need,” Warren Buffett

Investing Lesson 9: Keep It Simple

An element of simplicity is important. Buffett himself follows a simple to understand investing framework, which can best be defined as buying stakes in a business where the price you pay is far lower than the value you derive. He wants investors to invest in simple and understandable instruments only and using a process that one can easily digest.

For example, if you don’t understand cryptocurrency, don’t invest, trade, or speculate in Bitcoins or glamorous-looking investment vehicles we are exposed to every year.

“If you are uncomfortable with the asset class that you have picked, then chances are you will panic when others panic,” Warren Buffett

Finally, treat your body and mind like the only car you could have. If someone offered you the most expensive car in the world with a single condition that you never get another one, how will you treat this car?

With this analogy in mind, Buffett urges you to treat your body and mind the same way you treat your one, and only car. If you don’t take care of your mind and body now, by the time you are forty or fifty you’ll be like a car that can’t go anywhere.

Investing Bottomline

Buffett’s lessons are simple and straightforward. He submits to keep it simple, improve upon what you know, stay within your circle of competence and comfort zone, and there are enough opportunities for one to thrive in investing.

References:

  1. https://www.etmoney.com/blog/9-lessons-in-investing-by-warren-buffett/
  2. https://thetotalentrepreneurs.com/business-lessons-warren-buffet/
  3. https://addicted2success.com/life/5-lessons-we-can-all-learn-from-the-life-of-warren-buffett/
  4. https://finance.yahoo.com/news/5-warren-buffetts-most-important-224429018.html

Recession…recessions always come with significant increase in unemployment. It’s basically definitional. Employment and gross domestic product fall together during a recession.

Inflation Remains at Four Decade High in August

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Inflation, which is a loss of purchasing power, is likely to stay elevated thanks to a variety of structural forces.

The Labor Department reported an 8.3% year-over-year increase in the total Consumer Price Index (CPI) for August. It was a bigger gain in inflation, which is a loss of purchasing power, than expected. Economists and financial strategists agreed that the latest data show inflation is sticky.

Sticky inflation is underlying inflation, or inflation in areas where prices tend to change relatively slowly. Additionally, inflation is structural, meaning the floor is higher than many might assume, and the potential implications go beyond recession.

Vincent Deluard, director of global macro strategy at StoneX Financial, says the current period of inflation is the result of three shortages: labor, energy, and trust.

  • Labor. The U.S. labor market is still about seven million workers short of pre-pandemic levels.
  • Energy. The transition to green energy requires moving down the energy-density ladder for the first time in history, meaning the green transition will consume more resources for similar output. And, when withdraws from the strategic petroleum reserve (SPR) stops, it will remove a downward force on oil prices.
  • Trust. Inflation is inversely proportional to the level of trust between a country’s citizens. “Inflation is a fever that tells you an economy has an underlying ailment of weakening trust, then the fever weakens the body, and it all worsens,” opined Deluard. Inflation is “always and everywhere a psychological phenomenon,” where the problem worsens the longer it persists, Deluard states, as he modifies Milton Friedman’s take on inflation.

Additionally, the August’s CPI report puts the “peak inflation” assumption into question and shows that the labor market and demand -– not supply — problems are driving price increases.

More volatile inflation in categories such as food and energy, which economists and policy makers back out of inflation readings to get to what they call core inflation.

The Fed’s attempt to front-load interest-rate increases is one attempt to regain public trust and restore price stability. The “transitory” inflation argument that has been retired in speeches but not in spirit.

Investors, and central bankers themselves, may therefore be underestimating what the Fed must do to curb inflation, while simultaneously underestimating the odds that inflation remains well above 2% for longer.

References:

  1. https://www.barrons.com/articles/inflation-cpi-labor-shortage-energy-prices-51660265410
  2. https://www.barrons.com/articles/cpi-inflation-report-july-2022-data-51660078098?mod=article_inline

Life Purpose in Five Minutes

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Adam Leipzig gave a TED talk regarding discovering your Life Purpose in 5 minutes. In his talk, he discusses a five step process to find meaning and purpose in your life.

In a non-scientific survey of Yale University classmates attending a college reunion, Adam Leipzig discovered to his dismay — despite financial, material and career success — that:

  • The majority of attendees, eighty percent (80%), were unhappy with their lives, and
  • A minority of attendees, twenty percent (20%), were happy

He explained that the people who were happy with their lives knew their life purpose.  For this to take 5 minutes, you need to already know the answers to these 5 things or questions:

  1. Who you are
  2. What you do
  3. Who you do it for
  4. What those people want or need to better their lives
  5. How the people you serve change or transform as a result of what you gave or did for them.

The most successful and happy people in almost every field and walk of life  are outward focus and focus on the people they serve first and foremost.

So, when people ask you, “what do you do”, just respond how what you do changes the lives of people. For example: “I help people build wealth, better manage their money, and achieve financial freedom”.  In a way, this can become your personal brand and elevator pitch. And it can be that simplite.

Adam Leipzig is a producer, executive and distributor. and has produced more than 300 stage plays and live events, and one of the founders of the Los Angeles Theatre Center.

Your Life Purpose comes down to what you really want to do to serve others and what you really enjoy doing to serve other, in the end. What you feel the most alive and happy doing while serving others.

References:

  1. https://www.transcendyourlimits.com/find-life-purpose

Inflation: Decline of Purchasing Power

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Inflation is the decline of purchasing power of a given currency over time and it is a result of central banks printing money (increasing the money supply M2).

In 2022, inflation surged during COVID in large part due to loose money policy by the Federal Reserve, writes Brian Wesbury, Chief Economist, First Trust Advisors. It is the increase in the money supply initiated by the Fed that’s responsible for inflation.

Inflation is based on decisions made by the Federal Reserve and other sovereign central banks. It doesn’t matter whether government spending or the budget deficit is high or low, whether the labor supply is growing or shrinking, whether free trade is waxing or waning.

If the money supply grows too fast, you get more inflation; if the money supply grows too slowly or shrinks, you get deflation. If the central bank does its job right, you get stable prices, opines Wesbury.

Photo by Pixabay on Pexels.com

The Federal Reserve kept short-term rates artificially low and the M2 measure of the money supply soared.  Add supply chain bottlenecks and disruptions, U.S. consumers are experiencing near double digit inflation rates. inflation problem that existed before Putin ordered the invasion of Ukraine and, we think, will continue even if the invasion (hopefully) ends.

Inflation is measured by the Consumer Price Index and the Producer Price Index. And, all eyes will be focused on inflation data as CPI is expected to be released Tuesday and PPI expected on Wednesday.

According to Bloomberg’s economists’ survey, expectations are 8.0% year over year growth in CPI and 8.8% year over year growth in PPI, these are important data points for future Fed rate hikes and are likely going to move equity markets as a result.

  • The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living.
  • Core CPI, which strips out the volatile food and energy components of the report and is closely tracked by the Federal Reserve
  • The Producer Price Index (PPI) is a group of indexes that calculates and represents the average movement in selling prices from domestic production over time. Producer Price Index represents a reading on inflation from the production side of the economy, measures the change in the prices paid to U.S. producers of goods and services,

Despite some signs inflation is abating, Federal Reserve officials have acknowledged continued tightening is likely needed to restore price stability to the central bank’s target rate.

In June 2022, the Federal Reserve (the “Fed”) raised the Fed Funds Target Rate by 75 basis point (“bps”), the largest increase since 1994. Along with a stunning large hike, there was a reiteration that reigning in of inflation was the top priority no matter the economic costs.

Central bankers, such as the Fed, have the mission and ability to adjust monetary policy so that higher inflation doesn’t result. It is ultimately the increase in the money supply that’s responsible for inflation.

Which is why inflation is going to keep exceeding the Federal Reserve’s supposed 2.0% long-term target for a long time to come until the money supply ceases growing rapidly and the Fed hikes the federal fund rates and tightens the money supply. Currently, the money supply is nowhere close to being tight and tight it will have to get in order to tame the inflation.

References:

  1. https://www.ftportfolios.com/Commentary/EconomicResearch/2022/3/14/its-the-money
  2. https://www.ftportfolios.com/Commentary/Insights/2022/7/25/alternatives-update-2nd-quarter-2022
  3. https://www.ftportfolios.com/retail/blogs/marketcommentary/index.aspx