Why Inflation Matters


Why inflation matters: How the Fed is creating real estate inflation and hiding behind inflation data to continue their expansionary ways. OER and Case Shiller divergence.

Inflation matters.  It matters a lot.  Contrary to what you may hear in the mainstream press the Federal Reserve has done everything to stoke the fires of inflation.  The reasons for this include creating asset inflation that is understated in CPI data and also setting up a system where consumption is almost forced upon consumers.  How so?  With negative interest rates consumers are losing money by simply having their money in a savings account.  Even a modest rate of inflation will erode purchasing power when banks are paying zero percent on your hard earned deposits.  Yet this is all part of the design.  Inflation matters because it does encourage spending.  You want to spend today given that your current dollars will lose value tomorrow.  The Fed likes inflation so much that it has reignited the housing market once again while it has expanded its balance sheet to over $3.3 trillion.  Inflation absolutely matters.


 A brief history of inflation on the dollar

What is interesting is the US dollar held steady for nearly 60 years between 1870 and 1933:

inflation on prices

Once the gold standard was abandoned, the US dollar has been on a steady decline since the 1930s.  It is an interesting trajectory including the era when Nixon closed the gold window.  We are merely making an observation of the data here.  Without a doubt the US dollar has lost its purchasing power over the decades.  This matters because it has also had a major impact on wages and the standard of living especially for the US middle class.

Adjusting for inflation household wages are back to levels last seen in 1995:

inflation adjusted income

This matters because gas is no longer $1 a gallon and no longer can you work part-time at a minimum wage job and put yourself through college.  Those days are gone.  The cost of living for most Americans has gotten more expensive.  We found out this week that home values are increasing at their fastest pace since 2006.  The annual increase in prices is over 10 percent.  Of course much of this is not coming from wage growth and this should be obvious because of the previous chart.  This is largely coming from the actions being taken on by the Fed which is funneling trillions of dollars into the housing market via negative rates and encouraging the financial sector to speculate once again in housing.

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