You should be happy about inflation

Corporate interests have made every effort to make the current inflation rate, the highest in three decades, look quite scary. President Donald Trump has waxed poetic about nonexistent $7.50 per-gallon California gasoline. The New York Times and Washington Post have both run stories about inflation worries, saying that prices have increased 6.2 percent  in October 2021. This is intentionally misleading. Prices, in October 2021, are 6.2 percent higher than a year ago. 

The old-school economic wisdom suggests that inflation above a low rate is quite a bad thing. Prices increasing means that, as you may expect, people can’t pay for goods. The old-school analysis of the common cause of inflation is explained by the Phillips Curve, which suggests that there is a very strong, indirectly causal relationship between unemployment and inflation. If most people are employed, more people will have money to spend, which will drive up both wages and demand for goods, which in turn drives up inflation. As such, inflation-hawks worry about raising wages, reducing unemployment, or government spending on account of the possibility of rising inflation. 

The only issue is that the Phillips Curve doesn’t match recent historical data. The last couple decades have featured very low unemployment, coupled with very low inflation. This has been all the more surprising considering the Federal Reserve’s program of quantitative easing, which involves increasing the money supply to stimulate the economy, which one would think might trigger inflation. The conventional wisdom among economists is that, for quite some time, the Phillips Curve has simply been broken. 

Inflation often spurs on wage growth. If workers can see prices rising, they have a better mandate for demanding higher wages. In fact, some economists have argued that a lack of inflation has been instrumental in the stagnant wages of American workers in the last 40 years. If inflation sits at around 2 percent  a year, and workers get no raises, their real wages – in terms of buying power – just go down and down. 

If it raises wages, inflation may be a good thing. Of course, these increases in wages can also increase inflation itself, triggering what economists call the “wage-price spiral.” This theory has fallen out of vogue to some extent, especially in light of our current situation. The common view among economists at present is that our current bout of inflation does not have anything to do with the recent wage increases across the U.S. (the highest since the 1980’s). Of course, this year’s high inflation, as corporate media has been wont to report, has wiped out all wage gains for workers this year — wage increases and inflation have been similar through 2021. This would be quite concerning, if not for the most important facet of inflation – its relationship with debt. 

There is another respect in which inflation is quite a good thing for all but the very rich. It reduces your debts. If you are a debtor, inflation decreases the value of the money you must pay back. Since the dollars decrease in value over time, $1,000 now is worth more than $1,000 later. The current inflationary run has moved, in terms of value, $850 billion out of the hands of creditors and into the hands of debtors. 

This is class warfare. Creditors are usually the uber-wealthy who control the banks, and large corporate interests. Meanwhile, the vast majority of Americans are significantly in debt. The median amount of outstanding debt for an American in 2021 is $65,000. This debt is worth less and easier to pay off when wages and inflation increase in lock-step, as they have in 2021. Note, however, that the two have increased largely for different reasons—this year is the most successful in a generation for labor movements in the U.S., and the leading theory for the cause of 2021’s inflationary run is international supply-side issues, which should decrease as the pandemic eventually wanes.  

As long as wages increase and inflation maintains similarly high rates, those who aren’t incredibly wealthy, and especially those with significant debt, like St. Olaf sized student loans, ought to be very happy. 

 

graham10@stolaf.edu

Lila Graham is from 

Warrenville Illinois.

Her major is philosophy.

 

+ posts