There is too much negativity and conspiracy theories circulating arround the web and media relating to economic meltdowns, inflation and the food crisis. That being said, one concern of mine lingering out there is inflation.
The purpose of this post is to in simple non technical terms look at the possibility of inflation and in the end give you and idea what you can do about it.
- If you want a more indepth theoretical understanding of price inflation I wrote a post on Wicksell and prices.
An argument for inflation
Inflation could be around the corner. Why? The Federal Reserve bank has printed a lot of money (figuratively) through quantitative easing. Even though the demand for money is low and therefore, price increases should not be a problem. That being said inflation might set in:
- My calm rational economist hat tells me, there will be no inflation. This is because prices are controlled by both the supply and demand of money, not just the supply. Look at Japan for twenty years they keep a low interest rate environement and had deflation.
- However my common sense hat tell me, every nation that over extends itself through foreign wars, debt and printing money eventually has a weakened currency. In fact, I can not think of one country that has not done this.
- Inflation is a form of taxation. It erodes the buying power of the consumer and decreases the debt owed by government. When governments have a spending and debt problem they consciously or unconsciously inflate the currency.
- Points two and three above outweight point one, therefore, inflation is possible and probible. Although I do not hope for it. The only thing that can prevent it is a higher interest rate enviroment, fiscal resposibility and possibly but not likely and end to fiat money.
Government price index and what have you observed with prices at the store
- Every time I go to the shop, prices for food are increasing. Food is my biggest variable cost. I live in Europe but I know it is the same in the USA. It is no coincidence that central bank policies are the same regarding the money supply
- A few years ago you could hire people to do jobs for you at a reasonable price. Now even with some wage deflation, people do not have the money to hire and complete projects as their disposable income is less, because of price increases.
- I personally have observed people are not buying things like books and fun things as they use to. These are being replaced by purchases of food and gas.
- Spending is getting more conservative as prices are increasing on basic items, mostly food and gas.
- Inflation is starting in a subtle way and purchasing power is erroded, no matter what the official statistics are tell you.
This is not me speaking as an arm-chair economist, but what I have observed in my personal life.
If you are concerned about price increases, I wrote a post on how to save money despite inflation. I always believe that you should focus on the income generation problem rather than saving every penny. However, saving while you are working on your empire to make money with stocks or your job or your own business is not a bad idea.