Inflation is referred described as a “hidden tax” by some. It does not require legislation from Congress or the states, unlike other taxes. It isn’t deserving of a line on the 1040 federal income tax form, which many Americans will submit this week. It also doesn’t reflect as a % markup on the items we buy on the bottom of sales receipts.
Nonetheless, it drains resources from the economy and redirects them to less productive activities, much like a tax. It distorts pricing signals and causes capital misallocation. It’s a quiet way for the government and central bank to weaken the currency, hike prices, assist borrowers while punishing savers.
The official campaign for increased inflation as a remedy for the United States’ sluggish recovery began roughly two years ago with a study titled “Rethinking Macroeconomic Policy” by IMF researchers, including Chief Economist Olivier Blanchard.
Ken Rogoff of Harvard (does he think this time is different?) and Greg Mankiw, an economic adviser to President George W. Bush, are among many who have gotten on board. Higher inflation, they believe, would hasten the deleveraging process by allowing debtors, such as the US government, to repay their loans in depreciated dollars. (Borrowers get a 1, savers get a 0)
Another proponent of higher inflation, Princeton University’s Paul Krugman, claimed in a New York Times essay on April 5 that 3% or 4% inflation would “almost certainly assist the economy.” This would be accomplished by degrading the real worth of debt and dissuading firms and consumers from hoarding cash.
Think about what 6 to 8% inflation could accomplish if 3 to 4% inflation can do all that!
One of the drawbacks with aiming for a little more inflation is that you can wind up with a lot. Excess reserves, or inflation tinder, amount to $1.5 trillion on the Federal Reserve’s balance sheet. Banks will eventually find a more profitable method to exploit the 0.25 percent interest-paying deposits at the Fed: issuing loans, for example, which expands the money supply.
“It took three decades for people to believe the Fed was serious about committing to a long-term inflation goal of around 2%,” Jim Glassman, senior US economist at JPMorgan Chase & Co., says. “Never again would you listen to what the central bank said,” he adds if the Fed breaks its word. “A bigger risk premium would be demanded by investors.”
All of this, according to Glassman, sounds like something made up in the classroom, which it is. Raising inflation expectations lowers the real funds rate, which is already negative, and makes borrowing more appealing because the nominal funds rate cannot go below zero. So much for the much-needed debt reduction.
What about long-term interest rates, which appear to be the Fed’s main focus? The yield curve would steepen as nominal long rates adjusted to reflect increased inflation expectations, and the Fed, fearful of increasing mortgage rates, would initiate QE7, or whatever round of quantitative easing we’re on at the time.
Take a step back from the “how to” debate and contemplate the “why.” When the government prescribes the same policies that led us into this trouble as the remedy, something is profoundly wrong. The United States is living beyond its means. For the fourth year in a row, the federal government has a trillion-dollar deficit, compounding its failure to keep promises made to future retirees. Because home ownership was promoted as a reliable piggy bank, consumers went on a credit spree. All of the financial crisis postmortems underlined the need to save more and consume less.
Nonetheless, how come the road to abundance suddenly passes via Debtville and Inflation City? All of the incentives are pointing that way. Since December 2008, the Fed’s benchmark rate has remained between 0 and 0.25 percent. If Federal Reserve Chairman Ben Bernanke has his way that is, unless events force him to change his mind it will remain at zero until late 2014, a period of six years.
Would anyone in the financial markets have believed you 25 years ago if you told them the US economy would require near-zero interest rates for this long?
The Fed should not push us to spend, spend, spend if we need to conserve more, both personally and as a country. (Borrowers get a 2, savers get a 0) And some economists want to add more inflation to this poisonous mix?
Smart people, not conspiracy theorists, have begun to ask if Bernanke isn’t ready to err on the side of higher inflation to assist the US government pay off its $15.6 trillion debt. That is not a good way to build a reputation.
Bernanke is a history buff, and the Great Depression chapter currently has more dog-eared pages than the one on 1970s stagflation. That’s unfortunate because, according to Marvin Goodfriend, a professor of economics at Carnegie Mellon University in Pittsburgh and a former research director at the Richmond Fed, there’s enough historical “data Bernanke might utilize to start withdrawing before inflation gets ahead of him.”
Pre-emption does not appear to be part of Bernanke’s toolset. Maybe he has an extraordinary sense of timing, but if history is any indicator, the Fed will be late in normalizing interest rates. As a result, when we pay our taxes next year, we should expect to see part of that hidden inflation tax.
(Caroline Baum is a Bloomberg View writer and the author of “Just What I Said.”) Her views are entirely her own.)
Why is inflation considered a hidden tax?
Inflation is known as a “hidden tax” because it makes taxpayers poorer through raising expenditures and “bracket creep” while increasing the government’s spending ability. A tax bracket is a range of incomes that are taxed at different rates based on filing status.
In what way is inflation a tax?
There’s a conundrum here. Money is nothing more than a piece of paper with some writing on it. It can be printed at any time by the government. The government, on the other hand, can take these pieces of paper and exchange them for real-world goods and services. It can be used to pay soldiers, nurses, or road construction employees. It has the ability to print money, send it over to Airbus or Boeing, and purchase a new plane. So, in this instance, who is truly footing the bill?
We already have all of the information we need to figure out the solution. Prices will eventually rise as the government prints more money. When we remember that real variables are independent of the money supply in the long term, we may derive this directly from the quantity equation. The extra money will just result in higher pricing and no more output in the long term. Furthermore, as prices rise, the value of existing money decreases. If the price level rises by 10%, existing dollar bills are worth 10% less than they were before, and they will buy (approximately) 10% fewer products and services. Inflation is a tax on the money that people have in their wallets and pocketbooks right now. We do believe that there is an issue.
Is there inflation that goes unnoticed?
A transcription service generated this transcript. This version may not be complete and will be updated.
Gabriel Rubin: I’m Gabriel Rubin. In certain circumstances, the price you’re paying for a product or service is the same as it was a few years ago, but you’re receiving a lot less for it.
J.R. Whalen: I’m J.R. Whalen, and I’m So, Gabe, why do businesses throw on these extra fees? Is it simply because they can, or is there anything else at work?
Gabriel Rubin: I’m Gabriel Rubin. Companies, like consumers, are currently confronting numerous economic challenges. Labor and supply chain concerns, as well as other pandemic-related interruptions, are causing them to incur substantially greater expenditures. As a result, they’re attempting to pass those expenses on to the customer, but they’re concerned that the customer may balk at the price rise and refuse to pay it.
J.R. Whalen: That’s right. I’ll get to how customers feel about this later, but how are corporations introducing these fees and charges without raising product prices? What does this mean for the typical shopper?
Gabriel Rubin: I’m Gabriel Rubin. Yeah. Many businesses are attempting to achieve this through various levies. They may even state out exactly what a consumer is paying for, such as a restaurant that charges a COVID fee because they have to wipe tables more frequently or comply with other government rules, in order to be as clear as possible. In other cases, they’re simply splitting things down and turning them into fees that were previously included in the service. For example, in Chicago, a restaurant organization called Lettuce Entertain You (lettuce written like the leafy green) charges a 3% processing fee that guests can request to be eliminated if they see it and ask the waiter to do so. And they claim it’s because they’ve had to cope with a lot of escalating costs as a result of COVID rules that are required to keep the restaurant running.
J.R. Whalen: I’m J.R. Whalen, and I’m Are these simply cost increases, or are firms providing something to consumers in exchange for these increased costs?
Gabriel Rubin: I’m Gabriel Rubin. In some circumstances, such as at vehicle dealerships, there are non-negotiable add-ons. So, while you may be receiving a service, you are not consciously deciding to do so. So, while you may be getting more bang for your buck, it’s money you didn’t mean to spend in the first place.
J.R. Whalen: That’s correct. As a result, no one like seeing unexpected charges on their bill. Is there anything more subtle than putting on fees that firms are doing?
Gabriel Rubin: I’m Gabriel Rubin. Yeah. In certain circumstances, the price you’re paying for a product or service is the same as it was a few years ago, but you’re receiving a lot less for it. So, at Disney World, for example, free shuttles from the airport to your Disney hotel are no longer included, and you must pay for an Uber, Lyft, or another shuttle service. Also, hotels, not necessarily Disney hotels, might not clean your room every day like they did before the outbreak. So, you can pay the same price for a hotel room, but you’re receiving poorer quality because they’re not cleaning it, or the breakfast that used to be hot eggs, toast, and bacon has been replaced with a small box of cereal or a granola bar in a paper bag. So, even if the amount you’re paying is nearly the same as it would have been before the pandemic, you’re getting a lot less for your money.
J.R. Whalen: I’m J.R. Whalen, and I’m When it comes to food, I’d want to concentrate on the grocery shop excursion for a bit. Food prices have ripped a greater hole in people’s finances than they did a year ago, so how are supermarkets and food manufacturers avoiding hiking the prices we see on the shelf?
Gabriel Rubin: I’m Gabriel Rubin. Yeah. Grocers and food manufacturers are reverting to an old method of inflation concealment known to economists as shrinkflation. Shrinkflation occurs when the price of a commonly recognized item at a grocery shop remains relatively constant. You might boost it a little, but you’re essentially maintaining the price while providing them a lot less. So, for example, we spoke with someone in Connecticut who was shopping for his family at their local grocery store. He also grabbed a block of cheese that he usually buys, which was around the same price. He stated that it was roughly ten cents higher than he remembered. Then he noted that it appeared to be much smaller, and he calculated that it had shrunk from 16 ounces to 12 ounces. So, even if the price is nearly the same as before, people who don’t look closely at the unit costs for products may be paying a lot more for what they’re getting.
J.R. Whalen: The unit price, of course. I use it all the time because it allows me to compare apples to apples. However, I assume that paying attention to unit costs requires customers to be a little more observant, right?
Gabriel Rubin: I’m Gabriel Rubin. Yes, it is correct. And I spoke with John Gourville, a pricing expert at Harvard Business School, who told me that in his and other research in this area, customers don’t actually look at unit prices. Since the 1970s, certain unit prices have been required by law. And the majority of the data indicates that people were interested in them in the 1970s, when they were a novel concept. However, unless you’re a budget-conscious shopper, you’re probably not checking the unit price of every item you buy at the supermarket.
J.R. Whalen: Gabe, we frequently hear from government leaders that they’re concerned about how prices have risen so quickly, but has anyone heard anything about these more secret practices?
Gabriel Rubin: I’m Gabriel Rubin. Yeah. Because of unit pricing and the ability to know how much something costs per ounce, for example, the government is pretty effective at tracking shrinkflation, but they’re not so good at recognizing quality decreases. A government analyst will have a difficult time calculating the value of having your hotel room cleaned every day. So, according to an economist I spoke with at the Bureau of Labor Statistics, which records those data, that’s something that’s very difficult to quantify, and it doesn’t really show up in government inflation figures. In terms of official monitoring, the Biden administration is working on a plan to look into some of these so-called garbage fees, or hidden fees, as they’re known. And the Consumer Financial Protection Bureau is looking into costs in the financial services industry, such as bank overdraft fees and other similar levies. The Department of Transportation is also looking into things like airline baggage taxes. And there’s a strong belief inside the Biden administration that these garbage fees stifle competition by preventing consumers from making informed decisions about how much goods cost if they can’t know what the final price will be. As a result, they see this as a competition, and I believe we can expect further moves in this area from the Biden administration in the future years.
J.R. Whalen: I’m J.R. Whalen, and I’m Now, I’m sure I know the answer to this, but how are consumers reacting to all of these fees and surcharges?
Gabriel Rubin: I’m Gabriel Rubin. Consumers are irritated by shrinking inflation, and they are concerned about inflation in general. When a dollar doesn’t go as far as it used to, consumers notice, and it shows up in consumer mood polls, which reveal that people are quite gloomy about the current health of the economy. Inflation expectations, on the other hand, ultimately drive future inflation. So, if you expect something to cost more in the future, you’ll probably be willing to pay more for it now because you don’t expect the price to fall. As a result, the risk in this sector is that customers will continue to demand greater prices, and businesses will continue to charge them, resulting in a continuing inflationary cycle.
J.R. Whalen: I’m J.R. Whalen, and I’m Is there any chance that these fees and levies will be eliminated anytime soon?
Gabriel Rubin: I’m Gabriel Rubin. It’s unlikely that those fees will go away anytime soon in our current climate, with so many unresolved COVID-related difficulties, such as in the supply chain and labor market. However, I believe that the fact that many of these companies chose to apply fees rather than straight-across price increases demonstrates that consumers are price-sensitive, and that these corporations do not want to impose new pricing that customers may not be ready to pay. It’s also a lot easier to get rid of a price than it is to get rid of something.
Is inflation a tax that goes unnoticed?
Inflation can be regarded of as a hidden tax for unrestrained government action, as Nobel Laureate Milton Friedman proposed in a speech during the period of rising prices in the 1980s.
What is deflationary repression?
Repressed inflation is defined as a situation in which direct economic controls (such as price and wage limits, as well as rationing) are used to avoid inflation without addressing the underlying inflationary pressures.
What is creating 2021 inflation?
As fractured supply chains combined with increased consumer demand for secondhand vehicles and construction materials, 2021 saw the fastest annual price rise since the early 1980s.
What effect does inflation have on tax brackets?
The Internal Revenue Service (IRS) of the United States alters tax rates each year to account for changes in the cost of living in order to determine federal tax liabilities. The IRS raises tax brackets upward each year to account for inflation in the US economy.
What is the difference between open and repressed inflation?
Open inflation occurs when prices rise freely owing to supply-demand imbalances in a free market economy. Suppressed Inflation: In a regulated economy, the upward pressure on prices is not permitted to impact the quoted or managed prices.
What causes inflation to become hyperinflationary?
However, if the increase in money supply is not accompanied by an increase in economic growth as measured by GDP, hyperinflation can result. Businesses raise prices to boost profits and stay afloat when GDP, which is a measure of an economy’s production of goods and services, isn’t growing. Because consumers have more money, they are willing to pay higher prices, resulting in inflation. Companies charge more, consumers pay more, and the central bank prints more money as the economy worsens, creating a vicious cycle of hyperinflation.