Inflation Is the Most Miserable Tax of All

By IPI President Tom Giovanetti

It was government policy that caused the inflation of the 1970s, and it’s government policy that is bringing inflation back today.

It’s baaaaack!

Inflation—the curse that helped make the 1970s a miserable decade—is finally showing up in official government data, though consumers have been encountering it for several months now.

According to InflationData.com, February’s inflation rate was 20 percent higher than January’s, March inflation “skyrocketed” over February, and then April inflation was “up sharply” from March. The Federal Reserve Bank reports that the level of inflation in April was more than twice its target rate.

Almost every business is reporting the twin problems of higher costs for supplies and an inability to attract workers. Restaurants, for example, are reporting an 8 to 10 percent increase in food costs, which consumers are also seeing at the grocery store.

And the “Misery Index” is back. First created in the 1960s, the Misery Index is the combination of the inflation rate and the unemployment rate. In September 2019, the Misery Index reached its all-time low of 5.21%, a result of, among other things, the success of the Trump administration’s economic policies.

The Misery Index temporarily spiked due to pandemic-related government lockdowns that dramatically increased unemployment. But now, the combination of higher inflation and lower but still nagging unemployment puts the April 2021 Misery Index at 10.26 percent.

The Misery Index’s all-time high was 21.98 percent in June of 1980, when the Johnson, Nixon, Ford and Carter administrations’ disastrous economic and foreign policies resulted in out-of-control inflation.
By contrast, Ronald Reagan, who was elected just five months later, implemented policies that sharply reduced the Misery Index to 7.7 percent within six years.

It was government policy that caused the inflation of the 1970s, and it’s government policy that is bringing inflation back today. Since 2016 the money supply (M2) has increased 47 percent, from $13.36 trillion to $19.67 trillion. And it’s more than doubled since 2010.

Besides expanding the money supply, the labor shortage creates its own type of inflation, because employers will have to offer higher and higher wages in order to attract the labor they need. Those higher labor prices will be passed along to consumers. Who is causing this form of inflation? The federal government, again, by offering workers more money to sit home on unemployment than they would make by reentering the labor force. And by pressuring employers to offer significantly higher wages.

Who benefits from inflation? Debtors, because they buy their goodies at today’s prices but repay the debt years down the road with devalued currency. And the federal government is the biggest debtor around, so the federal government has an incentive to pursue inflation.

Who loses from inflation? You do. Inflation is an insidious, hidden tax that shows up in everything you buy, erodes your savings, and causes higher taxes on your gains from saving and investment. Consumers and investors can’t predict it and can’t control it, hence the Misery.

Today's TaxByte was written by IPI President Tom Giovanetti.
 
IPI President Tom Giovanetti by N/A is licensed under N/A
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