Mechanics of Inflation
I will explain here shortly what inflation is and how it works, and I will debunk a lot of nonsense that people take for granted.
First of all we have to establish why it is good to know about inflation and keep track of it: Well, it's a basic tenet for correct accounting. If you have a weighting scale (mechanical) with which you measure your wealth, but you use your hand to move 1 side higher than the other, well that is cheating yourself and distorting the result. The same way monetary inflation is distorting your wealth, by inflating it, through which you lose your purchasing power. Yes on paper it looks good 1$=1$, but if you keep changing the reference point, then you are cheated, as 1$ in 2009 is better than 1$ in 2016, because inflation has moved the base point.
Therefore it's not enough to keep track of just your income/losses, you also need to account for inflation and currency devaluation, as described in my other article, so that you know exactly how much money you have:
1) Monetary vs Price Inflation
First of all, the real inflation is the monetary inflation. Which is defined as the growth of the money supply. I would take M1 as the liquid money supply, so I define it as the growth of the M1 supply, year-over-year. In the US you can keep track of this:
- https://www.federalreserve.gov/releases/h6/Current (As you can see 2016 inflation was 7.61%)
Then there is the price inflation, which is the inflation that actually trickles down to the consumers. It's measured by the CPI (which is the Consumer Price Index) which is an index of consumer goods, indexed together, so when consumer prices rise, the index rises too. This is how the economists measure inflation. Although this is not inflation, this is just the symptom of inflation.
Also the CPI is very poorly sampled, and it excludes real estate, oil prices, it's seasonally adjusted, and so on. It's a very massaged data, that is not uniformly representing all prices, but very biased towards "poor consumers", as it's biased towards everyday goods. Yes if food prices don't grow there is no inflation according to them, but that doesn't mean that other people don't lose money.
You can see the CPI stats for the US here:
So CPI price inflation is: 2.096% , while true inflation is 7.61%, simply because the CPI is a shitty statistic and doesn't include all assets in it. The printed money doesn't just disappear, it has to go somewhere. And simply by just ignoring certain prices, doesn't make the inflation go away. That is why it's just better if we look at the money printing information directly.
2) Socialism
Technically the CPI statistic is not wrong, but it's very misleading. So the CPI is sampled in a way to represent average consumer goods like food and basic goods. So it's biased towards poor people, who usually buy only these, and live from paycheck to paycheck. So yes in this sense if the majority of people are poor, and if wealth inequality is high, then the CPI does reflect the purchasing power of the majority of the population.
So while the CPI measures the theft from the poor, through inflation, the true inflation - the CPI difference is technically a theft from the rich. Because most rich people do invest in estate, oil, stocks and so on, which are not in the CPI.
So basically inflation is just a giant wealth redistribution system, whereas in the the middle class and the rich is shrinking by net -5.514% yearly, in wealth. Socialism right there.
3) Asymmetry
Another feature of inflation is that even if the CPI would actually measure all prices uniformly, then that Uniform-CPI would only be maximum as much as the M1 supply growth. It could not go higher than the M1 growth, so it would be <= then that.
You also have an asymmetry in the inflation trickle-down, because those that get the fresh money spend it first, and those that spend it last, get the worst money. The banks get the money first, because they make it, through fractional reserve lending, and Average Joe gets it last, through his paycheck. So inflation hurts fixed income people the most.
In the business side, also borrowers get it first, while investors get it last, so there is a transfer of wealth from investors/savers into borrowers hands.
There is also leverage and margin trading, so stocks and other financial markets are heavily pumped up by borrowed money into existence.
4) Different for each Consumer
Let's say bread and water price never goes up, either through technological innovation or just by itself. Well then if 1 bread and 1 glass of water costs 1-1$, and if your income is 100$, then you will never lose money if you are buying just bread and water. There could be a hyperinflation out there, but if you are only buying bread and water, you will never lose money, but as soon as you try to buy other stuff, you would see the losses.
So even though the theft happens just by expanding the money supply, not everyone is affected yet. It's like if a burglar robs your TV, well if you don't use the TV, then it's not really a loss for you, until you want to use it but can't because you don't have it anymore.
The same way, inflation hits everyone differently. Different prices grow at different paces, and inflation for you in the US might be 1%, or 2% or 3%, depending on what stuff you are buying in that year. But the maximum will be the M1 supply growth.
5) Relative Currency Value
Other than the monetary inflation, you also need to consider the relative value of the currency you are using, compared to other currencies. Since all imports/exports depend on this, and there is a good chance that your goods are imported, or at least affected by imports, you need to keep tabs on this too.
I have explained it here how you can use the Dollar Index to measure the strength of the USD:
https://steemit.com/money/@profitgenerator/how-to-calculate-your-net-worth
Sources:
https://pixabay.com
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