Matin Abdar

Name:
Module 2.1 Inflation
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1. With module one behind us, we are ready to explore the effects technology monetary status
of inflation and how having the ability to manipulate the money wage-earners Events,” Mass
supply in a way that reduces a currency’s scarcity leads streaming consumption-based
to inflation. A quick note before jumping in: we will reference the $500,000 debt cheaper
US many times throughout this course. We use the US as most fiscal $485,436.89. fall $500
people are familiar with the US dollar. Additionally, the US dollar $205,994.38 productivity, 3%.
is the global reserve currency, and its financial system is the rising 75% car internet
backbone of the entire world. Any monetary or financial paycheque. stability? “raise”
disruption experienced by the United States generally 2008 2-15% 30 beer).
reverberates throughout the international community and global expansion, “Key
economy, given the US Dollar’s status as the global under-reported. $28.65 9-14%
reserve currency. As we will see in this section, and as will be basket home COVID-19
echoed throughout this course, inflation is an outcome of trying 2020. robbing 7%, 5%,
to target continuous growth. Inflation has often been referred to adjusted scarcity universal,
as ‘the hidden tax’ – because It erodes our buying power (over 6.2%. debt many reduce
time, our dollars purchase less, essentially us of tweaking ingenuity 10%
robbing
our savings) while reducing the burden of government debt. It is Committee $28,654.28
one of the major byproducts of our monetary policy and should gospel, “CPI” $500,000
be taught in our educational system. Primarily, those with the devalue 2% forgiven
most barriers to wealth creation tend to feel its effects the most.
Inflation, by definition, is “a persistent increase in the level of consumer prices or a persistent decline in the
purchasing power of money.” And, it can be better understood as, “too many dollars chasing not
enough goods, causing prices to rise.”
2. How does inflation impact us? *A quick note before diving in – We refer to the yearly inflation rate when we
talk about inflation in percentage terms i.e. 3% inflation means 3% per annum. Let’s think about a fictional
example of exactly how inflation causes the loss of purchasing power over time. In his old ways, Grandpa
Joe stores his entire life savings in a suitcase under the bed. In this large suitcase, he has $500,000
in cash. He gives the suitcase to his Grandson George and says, “Promise me you won’t touch this money
for 30 years”. George does as his grandfather requested, but little did Grandpa Joe know that
George would live through a period of persistent inflation. Let us assume that the inflation rate during this
period was 3% We can see in the table below what the impact of this inflation had on the
purchasing power of George’s inherited wealth over those 30 years.
3. We can see that after the first year of George holding onto that money in the suitcase, his purchasing
power had reduced to $485,436.89 At first glance, that doesn’t seem too dramatic. However, if we look
further out, that 3% inflation slowly erodes his purchasing power, getting worse with each year that passes
 due to compounding. By the time George can finally spend the inheritance, it only buys him the equivalent
of what $205,994.38 would have purchased him on the day he received it. 3% inflation slowly chipped
away at George’s purchasing power and destroyed nearly 60% of his savings. Now, what if inflation was a
lot higher? Let’s look at 10% for comparison. That same $500,000 would have the equivalent
of the purchasing power of $28,654.28 30 years later. That’s a loss of nearly 95% of its value. We have
gone from buying a house to barely affording a car.
4. It kind of makes you wonder what the current inflation levels are, right? The conservative numbers
published in the US for October 2021 were 6.2% In other words, if that trend continues, the
money we put away today will be worth about 75% less when we need it in retirement, 30 years
from now. This forces us to save through investment, which bears different risks, such as market
downturns, corporate insolvency, political risk, etc.
5. Why did we use such large numbers in this example? After all, $500,000 seems like an absolute dream to
most. We chose this number to illustrate what inflation can do to an entire lifetime of savings over 30
years. The amount of money that could purchase a home 30 years ago will only buy you a modest
car today. However, it is essential to highlight that inflation has the same impact no matter the
starting amount. For instance, $500 would decay to a measly $28.65 (from a TV to a
burger and a beer
6. How is inflation measured? Most of us are probably familiar with one or all of the following terms: The
Consumer Price Index (CPI) Core Inflation Core CPI These terms are used interchangeably, as all mean
essentially the same thing. But, For clarity, we will use CPI to represent any and all of these
moving forward. CPI is the key measure by which most central planners (central banks/federal
reserve/governments) measure inflation in the economy. It also is one of the key inputs into their
decision-making processes regarding monetary policy (money “printing”) and fiscal policy
(government spending). CPI is essentially a basket of goods that central planners use to keep track of
prices over time (if you can monitor the price of something over the long term, you can watch the effects of
inflation). The problem is, that basket of goods is not constant, they are always tweaking and
changing what’s in the basket. It’s like trying to build a house with a ruler that changes its length every time
we look at it. Furthermore, inflation means different things to different people. If we were a single mother
with young children, our personal basket of goods looks a lot different than what Grandpa Joe’s were in
our above examples. A single mother’s basket of expenses may include things like, groceries,
electricity, school books, school fees, clothing, rent, car payments, and fuel ….just to name a few Grandpa
Joe may have healthcare and medical expenses but no educational outgoings in his basket of goods. The
point is, that inflation is unique to each and every person as everyone’s spending habits, preferences,
lifestyle and personal situation is different. Take note that a few expenditures mentioned above are

universal like food and energy. Therefore, you would assume that the government would want to
closely monitor these expenditures to better track inflation. Not so fast! Just as we were, you may be
shocked to find out that the core CPI used to dictate government monetary policy does not include food or
energy. You can be if you had to re-read that, but we assure you this is true, at least in the
forgiven
 US. Most governments worldwide are similar in that their basket of goods, used to track their version of
CPI, fails to represent those expenses that often mean the most to their citizens.
7. So why does this seem like such an inaccurate measure? Firstly, CPI influences monetary and fiscal policy
(Government spending). The lower the CPI figure, the more incentive governments have to stimulate the
economy. Secondly, tax brackets, social security and Medicare are tied to CPI. In other words, as CPI
decreases, tax revenue increases and social security and Medicare expenses decrease. For every 1.1%1
drop in CPI, the government gains $1 trillion in tax and medicare savings over ten years. For example,
suppose that Grandpa Joe is retired and receives full Social Security benefits. Each year, his benefits are

adjusted to keep pace with CPI. The higher the CPI number, the more significant the raise
he receives year over year. In other words, the federal government benefits when inflation is under-reported
The lower CPI, the greater the savings to their budgets. We have to ask, is CPI an adequate measure of
inflation? As an example of the erroneous nature of CPI, www.shadowstats.com is a site where the author
keeps track of inflation figures using the same basket of goods that were reported in the ‘80s and ‘90s. We
can see from the below graph that US inflation figures in 2021 are more like 0-14% and have
ranged anywhere from 2-15% over the past four decades when looking at the 1980 basket of
goods. If we refer back to our example with Grandpa Joe where we have inflation of 10%, it is no wonder
so many of us find it so hard to get ahead.
8. What causes inflation? There can be many causes of inflation but the main one to focus on for now is
money printing. You may have noticed that governments worldwide have been increasingly printing money.
When we left the gold standard in 1971, as mentioned under key events this was the
start of the print-our-way-out-of-trouble regime. Since the Great Financial Crisis in 2008, we have seen the
growth of monetary expansion (money printing) increase at an alarming pace, and our response to the

covid-19 pandemic has only made it worse. Many terms are used to describe this, like: “quantitative
easing” and “economic stimulus.” These are all fancy terms used to describe the same thing: increasing
the supply of money in circulation. How does this cause inflation? Simply put, more money in circulation is
chasing the same number of goods and services, resulting in rising prices. Look at the below
figure for the M2 money supply. M2 is the physical cash and savings deposits held at banks for Americans.
Note the dramatic upticks in the trend around 2008 and 2020 This tells us that more
money is chasing the same amount of goods and assets, leading to the increased prices we experience
today.
9. How do governments benefit from inflation? The Fed openly targets a 2% year-over-year inflation rate.
“The Federal Open Market commitee (FOMC) judges that inflation of 2 percent over the longer run, as
measured by the annual change in the price index for personal consumption expenditures, is most
consistent with the Fed’s mandate for… price stability.”4 In layman’s terms, the Fed seeks to achieve a 2%
annual increase in the price of goods and price stability. Instead of taking these targets as gospel
we should ask ourselves, does it make sense to target inflation and pricestability We live in a world
where we constantly strive to get more for less by increasing efficiency and productivity. For instance: Cars
were invented to reduce time spent travelling Mass production was introduced to reduce
 the cost of goods to the consumer The internet was born to aid communication and increase
information-sharing and consumption Music streaming was created to consolidate music into one
easy-to-access space Movies on demand gave anyone access to shows without having to travel to the
movie store And the list goes on. At no point has human ingenuity been used to get less for more,
with the exception of inflation targeting.
10. Although it is possible to see prices rise (natural inflation) through structural demographic changes or
supply and demand imbalances, prices of non-scarce goods, services and assets tend to fall in
the long run as technology and production increase. However, by targeting inflation, the Fed actively
aims for a steady increase in prices over time. They can achieve this through monetary expantion
which creates a slow decay in the purchasing power of the currency, and in turn, an increase in the cost of
goods, services and assets. This is not natural. Instead, as technology advances and we see increased

productivity prices should naturally decline, and the currency should strengthen, allowing us to buy more
for less. If inflation hurts everyday citizens, it would be logical for one to question, why target inflation at
all? Shouldn’t the goal be no inflation? Although governments target inflation for many reasons, one major
reason is that if they can make their dollar debt cheaper to pay back over time (through inflation),
they can spend and invest more. When their debt levels are so significant that they are impossible to pay
back, they look to devalue the currency to help reduce the debt burden. Their choices are: Increase
taxes (people notice as their income decreases) Decrease spending (sometimes not possible without
systemic collapse) Drive inflation (the responsibility and blame is diluted because inflation is “everywhere,”
and the burden can be shifted to “greedy corporations”) Guess which one they choose? Remember,
inflation aids debt holders and hurts wage-earners as inflation gives us the artificial perception of
growth at the expense of the currency’s purchasing power. What’s more, our system is set up so that
politicians are only in place for fixed-term lengths (3-4years). This puts politicians in a predicament as it is
hard at times to choose the option best suited to the long-term prosperity of the economy when it is at the
short-term detriment of the balance sheet. We will better understand these problems and solutions further
on in this course. But, won’t all our personal debt get inflated away too? Inflation indeed makes
government debt cheaper to pay back. It is also true that personal debt becomes more affordable to
pay back (in the long term). But it is essential to highlight that inflation significantly impacts our ability to
service our debt in the short to medium term, making life difficult for those living paycheque to

paycheque Inflation hits our wallet through the increased prices on everyday goods like fuel, energy and
groceries. This directly impacts our ability to service our debts and financial obligations, pressuring us to
make difficult sacrifices leading to a lower quality of life. Additionally, by reducing the debt burden, you
encourage a fiscally irresponsible consumption-based economy, but more on that later. As an individual, in order
to stay afloat, we need our wages to keep up with inflation. If our wage growth lags inflation, for each year
inflation persists, we are robbed of purchasing power. For example, if we have a great year and our boss
rewards us with a pay raise of 5%. yet inflation is 7% the reality is that we had a
loss of purchasing power. Not the increase in purchasing power we initially thought we
2%
gained from our pay rise. It is therefore vital that wage growth outpaces inflation.