Deciphering Inflation: A Closer Look at Economic Realities

Inflation is a widely used yet often misunderstood concept. For many, it simply means prices of goods going up. However, experts tend to complicate things with terms like money supply, interest rates, and monetary policy, leaving us confused. This complexity becomes a shield for the government’s inefficiency, allowing them to hide behind the saying, “As you make your bed, so you must lie in it.”

To grasp how inflation works in our economy, let’s understand the flawed structures of global currencies. Going back to 1944 and the Bretton Woods agreement, gold became the basis for the U.S. dollar, and other currencies were pegged to its value. This system collapsed in 1971 when the U.S. faced a huge deficit. To conceal their incompetence, policymakers dissolved the agreement and printed immense amounts of money without considering the consequences.

Now, currencies, including INR, are hollow IOUs without intrinsic value. Most currencies follow a floated exchange rate system, where supply and demand, or the faith in governments, determines their value. With this background, we can understand that inflation mostly occurs when there’s an increase in money supply and credit in our economy.

Credit, a least understood concept, is a major reason for economic bubbles and subsequent bursts. In simple terms, credit is borrowing from the future to repay debts now. Governments and central banks use statistics like CPI (Consumer Price Index) and PPI (Producer Price Index) to gauge inflation. However, CPI, including volatile elements like food and energy prices, can create a false impression of inflation, often serving political motives.The true measure of inflation remains elusive, but Core Inflation provides a more accurate reflection. By excluding food and energy prices, it offers a stable indicator of future inflation and provides early warnings. Core Inflation is often overlooked because it requires a focus on income levels, which is challenging for governments. So according to me, CPI creates the false impression of inflation in the economy or this is more of government-created inflation, so what will the government get by doing this? The answer is due to much of political reasons such as-

• To show that our policymakers are stimulating our economy because inflation is a synonym of growth for most of the audience out there.
• As inflation increases, currency become cheaper, therefore it helps the Government to repay their debts and obligation.
• As inflation increases, the income of people tends to increase (but still such an increase is less than a real increase in inflation), which forces the people to move to a higher tax bracket. Hence the collection of more tax.

Ignorance of governments and central banks worldwide leads to credit crises, where expenditures are financed by debt rather than income. Lowering interest rates becomes ineffective when they are already close to zero. To recover from such recession, the government has the following ways-

• To cut down the spending (this lead to unemployment and more painful and sometimes creates more problem than solving it
• Reduce debt burden (it lead to defaults on the loan, reduce debt and lower interest rate)
• Redistribution of wealth, as an increase in taxes (mostly avoided due to various political reasons)
• Print more currency to buy bonds and fixed assets and increase the money supply in an economy.

Finding the right balance is crucial. While printing more currency may seem less painful, if not controlled, it can lead to hyperinflation. It will cause currency to become cheaper, further decrease in value of assets, stocks and real assets in the economy. Policymakers should prioritize long-term productivity over manipulating demand. The solution lies in pegging currencies to commodities rather than allowing them to float freely. This critical issue affects the middle class and misuses taxpayer money, exacerbating the wealth gap. This is essential to avoid credit bubbles like The great depression, Japan’s economic bubble of the 1980s and US housing bubble.

Despite the challenges, governments must openly address these issues, keeping the economy separate from politics. Acknowledging the harsh realities is essential, as hidden truths are unspoken lies. As one of my favorite Pinterest quotes goes, “It’s better to know and be disappointed than to never know and always wonder.”