Inflation reports are flawed as they rely on a moving 12-month time period, ignoring the cumulative effects of inflation over time. This is especially relevant when considering the impact of the Covid pandemic, with the Federal Reserve pumping trillions of new dollars into the financial system to counter the recession. This significant increase in the money supply is a key driver of inflation, exacerbated by near-zero short-term interest rates set by the Fed.
Looking at the money supply (M2) data, we see a 40% increase from January 2020 to January 2022, with the Fed only now starting to plateau this growth. Similarly, the Federal Funds rate has been kept low for an extended period, further contributing to inflationary pressures. The need to track cumulative inflation is crucial in understanding the true impact of these monetary policies on the purchasing power of the dollar.
The cumulative inflation rate of 20% over four years means it now takes $120 to make a purchase that would have cost $100 in January 2020. While this may benefit stock investors, it poses significant challenges for individuals whose incomes, savings, and assets have not kept pace with inflation. As a result, many are facing financial difficulties, with late loan payments, including for mortgages, on the rise.
The Federal Reserve’s focus on reducing the 12-month inflation number is misguided, as it does not address the lasting damage caused by their policies. While some may benefit from rising prices, many others are struggling to make ends meet in an environment of increasing inflation. It is essential for policymakers to consider the broader impact of inflation on different segments of the population and take appropriate measures to address the underlying issues causing economic distress.
