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The Victims of Inflation

Summary:
Inflation gets pitched as something inherently good the Fed is trying to make sure folks gets enough of. But someone’s paying the price. This is the transcript from my podcast, THE WOLF STREET REPORT: OK, this is something new in the already tarnished history of mankind: Governors of the Federal Reserve have been fanning out to explain to folks that inflation is “too low,” and that consumers’ and workers’ expectations of future inflation are too low, and that the Fed, for the first time ever, might use monetary policy, such as cutting interest rates, in order to create more inflation. In the past, the Fed has used monetary policy, such as raising rates, to tamp down on inflation. And in the past, it used interest rate cuts to stimulate the economy. Now the economy is humming along

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Inflation gets pitched as something inherently good the Fed is trying to make sure folks gets enough of. But someone’s paying the price.

This is the transcript from my podcast, THE WOLF STREET REPORT:

OK, this is something new in the already tarnished history of mankind: Governors of the Federal Reserve have been fanning out to explain to folks that inflation is “too low,” and that consumers’ and workers’ expectations of future inflation are too low, and that the Fed, for the first time ever, might use monetary policy, such as cutting interest rates, in order to create more inflation.

In the past, the Fed has used monetary policy, such as raising rates, to tamp down on inflation. And in the past, it used interest rate cuts to stimulate the economy.

Now the economy is humming along at a reasonable pace, the stock market is at all-time highs, and so based on the economy, there is no need to cut rates from the already low levels. But inflation is “too low,” and that’s the reason to cut rates.

They make it sound like inflation is something inherently good, something that we need more of. And that’s how the media, such as the New York Times and NPR and almost all others, pitch inflation to regular folks, as something inherently good that the Fed is heroically trying to make sure regular folks get enough of.

But who benefits from this consumer price inflation, and who are the victims?

Consumer price inflation is when the same thing with the same qualities gets more expensive. In other words, it takes more dollars to buy the same thing with the same qualities.

So when you buy a new product, such as a new car, that car is a lot more expensive than the last car you bought 10 years ago. But today’s car also has more safety features such as an improved crumple zone, improved side-impact protection, more airbags, and the like. It has more convenience features, such as consumer electronics, a backup camera, and the like. It has a seven-speed or eight-speed or perhaps even a 10-speed automatic transmission, instead of a five-speed automatic transmission. It performs better and runs cleaner. The suspension system is improved, and it’s more comfortable and handles better. And so on.

America is a competitive market place full of astute, finicky, disloyal consumers who are experts in comparison-shopping and who educate themselves about products they buy.

Companies have to respond to stay relevant. They always have to improve their products. Consumers demand it. If the products of one manufacturer stagnate, and the products of other manufacturers get better, the laggard will experience falling sales, until it will right the ship – or sink. Those are the two options.

To stay alive, companies are trying hard to constantly improve their products, unless they have a monopoly. And these improvements cost money, and when these costs are added to the cost of the product, this additional price increase due to quality improvements is not considered inflation.

Yes, your costs of living go up because you bought a more expensive product – whether you wanted all these added improvements or not. But inflation means that you spend more for the same unchanged product with the same qualities.

Inflation means that the money that workers earn buys less; and they have to spend a larger slice of the fruits of their labor to buy the same thing.

Consumer price inflation is the loss of purchasing power of the dollar. And thereby, it’s the loss of purchasing power of labor.

And this identifies the victims of consumer price inflation: Americans who work for a living. The fruits of their labor are being eaten up by what the Fed is trying to create more of.

People often say that inflation is a benefit because it helps pay off debt. But whose debt?

When a consumer has to pay more for goods and services because of consumer price inflation, there is less money left over to service debt. In other words, consumer price inflation makes it harder for workers to pay off their debts, not easier.

And this is what the Fed wants to create more of, and what the media are telling consumers is the best thing since sliced bread: making it harder for consumers to make ends meet, and making it harder for them to deal with their debts.

Consumers and workers don’t benefit one iota from inflation. They’re just victims of these policies.

Consumer price inflation is only good for businesses. It means that companies are able to raise prices for the same thing, and that consumers accept these price increases, and that these price increases stick, and that companies get away with them.

This is why, for the Fed, raising inflation expectations is so important. If consumers expect more inflation, that is, if they expect more price increases and accept them as normal, they will try less hard to dodge these price increases by finding alternative products with lower prices, and thereby they’ll make it easier for companies to raise prices.

For companies, being able to increase the price of the same product means increasing revenues and cash flows without having to sell an improved product or more products. Consumer price inflation is the easiest way in the world for a company to grow its revenues and cash flows, and the most rewarding way because jacking up prices doesn’t involve additional costs.

And profits increase too if input costs rise just a tad less than the prices that the company charges.  No one on Wall Street looks at inflation-adjusted revenues and profits. No one wants to look at it. They could if they wanted to. But no one wants it known that the revenue increase was due to price increases. Investors want higher sales and profits, no matter how they get there, and if price increases are the cause, that much the better.

And there is another big benefit of consumer price inflation for Corporate America: These higher prices that create higher revenues and higher cash flows allow companies to service their debts more easily.

So let’s keep that straight: Consumer price inflation helps companies service their debts since they benefit from the higher prices; while the same inflation, which eats slice after slice out of the fruits of labor of workers makes it harder for workers to service their debts.

When people say that inflation is good because it reduces the burden of debts, this is exclusively true for businesses that are able to raise their prices. But the opposite is true for consumers; they’re just the victims of this inflation.

There is another type of inflation: wage inflation.

For many companies, the cost of labor is the biggest component of their costs. Even small increases in these labor costs can eat up their profits. Labor costs include insurance, benefits, taxes, and other things. But the primary component are wages.

Companies spend an extraordinary amount of effort on keeping down their costs, including wages. Companies want consumer price inflation but they don’t want wage inflation.

Wage inflation is not when you get paid more as a result of a promotion. And wage inflation is not when you get paid more for producing more. When you get paid twice as much because now you make 4 widgets an hour instead of 2 widgets an hour, you get paid for a productivity gain of 100%. But it means there is no wage inflation involved.

Wage inflation is when you get paid more to make the same 2 widgets per hour, at the same quality. It takes this type of wage inflation to compensate workers for consumer price inflation.

Companies don’t do this voluntarily. This condition arrives when companies have trouble hiring people at the wages they’re offering, and they have to offer higher wages to attract candidates.

But companies fight wage inflation tooth and nail. Companies invest vast sums in automating their production in order to reduce their costs of labor. They offshore work to cheap countries to dodge wage pressures in the US. And they bring in workers to create a larger supply of cheaper labor, even at the skilled levels, that is putting downward pressure on wages in the US. The tech industry is infamous for strategies that include the extensive use of H-1B visas.

It boils down to this: Companies and consumers are lined up at opposite sides of inflation.

And when Fed governors fan out to tell people that they want to cut rates in order to create more inflation, and when the media, including the New York Times and NPR, promote this as a beneficial goal and as something the Fed should do, they’re clearly taking the side of Corporate America, to enhance Corporate America’s revenues and profits, and they’re lining up against American workers and the fruits of their labor.

Consumer price inflation is the enemy of the people. But it’s a godsend for companies. And the Fed should at least be honest enough to explain this, and to point out that the victims are workers and consumers, and that the beneficiaries are companies, and that this is how it is, because this is what America stands for, and that consumers should just shut up and quit complaining, and that at any rate, the beating will continue until morale improves, or something.

You can listen to and subscribe to my podcast on YouTube.

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The Victims of Inflation

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Wolf Richter
Founder, Wolf Street Corp. In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China.

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