Thoughts on Inflation

Inflation has many causes, including increases in demand for products and services, shortages of raw materials and wage increases.

Our federal and state governments would benefit from additional income tax revenues generated from inflation.

Weak demand for labor and an economic slowdown in China and Europe has led to a decline in the value of commodities and reduced inflation. Some people have benefitted. Others have been hurt.

Inflation generally harms people living on fixed income and helps borrowers. However, in recent years the lack of inflation and high rate of unemployment has promoted the Fed’s QE programs which have reduced interest rates payable on bonds and savings.

Many public pensions and welfare benefits have COLA clauses. Insolvent cities and states are looking to avoid paying COLA increases on pension benefits. Employees whose salaries are not keeping pace with inflation, are seeing their spending power reduced by inflation. Because of the high levels of unemployment employees have limited bargaining power or job mobility.

The value of homes generally benefit from inflation because income rises and the cost of building a new home increases. In this post housing bubble where home prices are depressed, it will take years of inflation and a reversal of many factors depressing demand for homes before housing prices recover to a satisfactory level. The middle class is being decimated by reduced home values.

State revenues have been substantially reduced by the collapse of the housing market. Increased state revenues are vital to increased highway construction spending and the creation of good tax-paying jobs. They will benefit if housing inflation returns.

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