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Why is inflation doing us dirty?

Why is inflation doing us dirty?

Over the last few weeks, you’ve probably heard a lot about inflation – in the U.S., inflation has climbed to a 40-year high, up 7.5% year-over-year. You’ve probably even heard more about what is causing inflation in global economies than about the inflation itself.

There are a flurry of theories – many political in nature. That’s because armchair economists on Twitter would like to blame President Trump or Biden for these problems – but many feel a global pandemic was out of their hands, and that it’s kind of a silly thing to do. 

What you need to know is that, yes, the COVID-19 pandemic is a capture-all answer for why inflation is so high, but it’s much more complicated than that. Here’s what you need to know:

The government printed a lot of money to shore up the economy during the early days of the pandemic – however, though it was a lot, it was fairly precedented for unprecedented times. World War II cost the United States the equivalent of $4.7 trillion in today’s money. As of March 2021, COVID related costs totaled $13 trillion according to the Nasdaq.

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However, don’t be deceived by that large figure – because most of that $13 trillion went to stabilizing the economy in its time of need. $3 trillion was spent on infrastructure, while $4.5 trillion was spent to pull down interest rates using something we call Quantitative Easing (QE). It involves using money to buy bonds and other assets, which reduces the interest rate on the bond. It’s a tool governments can use to keep the economy afloat during times of tribulation. 

Oftentimes, this kind of money printing doesn’t just prop up the economy or bond market – it boils over into all assets, sending the price of stocks, real estate, and other superior goods soaring. This is one style of inflation that people are talking about called asset inflation, but it will not last forever.

That’s because the U.S’s central bank (The Federal Reserve) will eventually pale back its “easy money” policies in an effort to atone for the radical, and breakneck pace, of inflation. Throughout this year, the Federal Reserve is likely to raise interest rates – and that will likely send asset prices falling.

However, there is still $5.2 trillion to be accounted for from that $13 trillion figure – and that was all the relief funding that covered things like vaccine funding, unemployment, schools, and stimulus checks. This money represented about 10-15% of all new banknotes in the economy. And that’s another kind of inflation – which the U.S. measures using something called the Consumer Price Index (CPI). It measures costs of things like used cars, oil and gas, food, and other goods that you spend money on.

This kind of inflation is slightly different, but often appears in tandem with asset inflation. However, inflation is still more complicated than even what we’re able to describe here – it’s not as simple as “we print money and it devalues the other money.” And not all money that is printed enters the economy as you know it, which you can obviously discern from this explanation.

The truth is that inflation is the result of many interlocking things – and the U.S. government’s central bank might look to atone for rising inflation by stopping its Quantitative Easing program this year. That’ll solve a lot of the asset inflation woes we’ve been seeing, but the market will have to grapple with other things too – such as supply chain issues, labor costs, production costs, and companies charging you more because they can.

Inflation is often wielded as a political point, which is why there is so much rhetoric about it. However, what you need to know is that inflation is complicated by many things and people have dramatized how bad it currently is. Right now, inflation is hot – but the economy is, too. In short: while these are strange times, inflation might be the least of your worries right now.

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