Economists define inflation as a pervasive and general rise in the average price level. The Consumer Price Index (CPI) measures the increase in prices of a particular basket of goods and services as measured by the Bureau of Labor Statistics (BLS). Over time, the BLS deletes no longer popular goods, such as typewriters, and adds new items, such as smartphones. The government does not include Food and energy prices in the CPI. So for a better indicator of inflation, you can go to Shadow Government Statistics – Analysis Behind and Beyond Government Economic Reporting. According to Shadow Stats, “The CPI chart on the home page reflects our estimate of inflation for today as if it were calculated the same way it was in 1990. The CPI on the Alternate-Data Series tab here reflects the CPI as if it were calculated using the methodologies in place in 1980.” Whatever the inflation rate per year, you can use the Rule of 72 to understand how long it will take prices to double. For example, if the inflation in any particular year is ten percent, 72 divided by 10 equals about seven, so it will take approximately seven years for prices to double.
An increase in the price of oil, fertilizer, and other raw materials can cause an increase in the prices of goods directly related to the rise in costs, but this is not inflation. If people do not have more money to spend, they will pay higher prices for necessities, but they will spend less money on nonessentials. There is only one reason for a rise in the average price level. Consumers must have more money to spend on all goods and services. Inflation can only occur when the Federal Reserve increases the money supply. The federal government borrows money by selling bonds to the Federal Reserve, and the Fed credits the federal government’s account by pushing a few keys on its computer. Economists call this practice monetizing the debt or quantitative easing (QE). Naturally, when the Fed increases the money supply more than the economy increases goods and services, we should experience an inflation problem. However, despite this flood of newly created money, inflation was kept low.
Quantitative easing did not cause inflation because much of this new money flowed to other countries instead of circulating in America. Because the U.S. dollar is still the world’s standard currency, there is a demand for it internationally. Second, when banks do not lend this money to the public, the funds will not cause inflation. Because the Federal Reserve pays interest on money that banks deposit at the Fed, banks have an incentive to park money at the Fed rather than lending it to people. The Fed’s interest is only about .05 percent, but banks still earn substantial interest because they deposit trillions annually. Third, a sluggish economy can impede borrowing, causing a slow down in the velocity of money. Velocity measures the speed at which a dollar changes hands from person to person. A decrease in velocity can inhibit inflation despite increasing the quantity of money in circulation. But now the chickens are coming home to roost. The Fed has created so much money to buy all these government bonds that Americans will witness considerable inflation in 2022. This inflation will hurt you if your income fails to keep up with the rise in prices of the things that you normally buy.
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