"Hidden" Inflation Isn’t Really Hiding At All

BALTIMORE, MARYLAND – The subject is inflation. How does it work? Why bother to think about it?

Don’t we have anything better to do?

(Next month, we’ll study the animal even more closely. We’re returning to Argentina, where consumer prices are rising at a 54% annual rate.)

Three Phases of Inflation

America’s Inflationary Era got underway on August 15, 1971, when the U.S. introduced a new currency, not backed by gold or anything else. This was the First Phase, from ’71 to ’81 when inflation went into consumer prices. Consumers didn’t like it.

Then, Paul Volcker “beat” inflation by putting the prime rate up to 20% and bringing on a recession. But inflation didn’t die. It simply moved to asset markets, where it was warmly greeted and continues to be more than welcome. This was the Second Phase.

The Third Phase began on September 17, 2019, when the Federal Reserve began printing money to cover U.S. deficits, with no pretense of an emergency.

Dear Readers might find this whole discussion a little peculiar. We are nearly 50 years into an Inflationary Era, but where’s the inflation? Consumer prices are still rising at only about 2% per year. At least, that’s what the feds say.

Economist John Williams, author of the Shadowstats website, calculates inflation using the same formula that the feds used in 1971 – that is, back when the U.S. still had real money. He shows that today’s inflation rate is 10% – 5 times the official rate.

In the stock market, inflation is more obvious. The S&P 500 rose 29% last year. Some of that can be traced to higher after-tax profits (before-tax profits went nowhere). But the largest part – 99% – was what they call on Wall Street “multiple expansion.” That is, price inflation.

But perhaps inflation needs some ‘splaining…

Always a Rip-Off

Adding fake new money is bound to shortchange someone, usually the person who has the old money. Retirees, for example, typically live on money they earned decades before. When consumer prices rise, they lose purchasing power.

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