High Inflation is Bad

Here is an article "High inflation is bad" by Moose responding to my previous post titled "Inflation. Friend or Foe?"

Thanks Moose for a great article. Let's hope that inflation rate will not be too high in 2008 and 2009.

Sidarta Tanu
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High Inflation is Bad
by: Moose

As I believe we all know, $1 today is worth more than $1 next year. Most items that we purchase every day either go up in actual price or there's less product for the same amount of price (the ever shrinking bag of potato chips that are like $1.59 now and go on sale for $.99 a bag is a good example... I remember 6 ounce bags being the norm, now you're lucky to get a 5 ounce bag with about 1/2 the bag being air!) The latter may not be considered inflation so much as the former, but since you're paying more per ounce, there is an inflation by ounce (which not everyone seems to notice or understand unless it's pointed out to them).

I believe inflation hurts the poor more than the rich, much like a rise in sales tax hurts the poor more than the rich in terms of pure purchasing power. Here in NJ we have a 7% sales tax rate. Let's say we have a unit that's retailing at $100 today in 2007. Let's say same item goes up 5% in March 2008, everything else being the same (though with Crybaby Tax & Spend Corzine in charge, who knows if the sales tax will remain the same). Now instead of pre-tax (let's assume the item is taxable) the unit being $100, it's $105. Now taxes must be computed on $105... so that's an additional $.35 in taxes on top of the unit's price... so REAL inflation would be from $107 to $112.35 (still 5%... but it's $5.35, not just $5). So for someone making $25,000 per year, that's a bigger chunk of their paycheck than someone making $50,000 or $100,000.

Consumerism is one of the things that makes the economy go... and makes people feel rich(er), even if they are poor(er) than their neighbor. If we can buy that new item as above (especially if we want it or there's a perceived need), there's a sense of pride. If we can't afford the item, especially due to inflating prices, consumers feel poorer than they really might be. Especially, if it's those 'little luxuries' we all enjoy... like cable TV (I know I didn't have cable growing up, but I can't imagine myself not having cable TV now) or dining out (yea, I could brown bag lunch, but that makes me feel poor, though I would if I needed to). Less of those things happening means less money changing hands, and less help to our economy.

I also believe inflation is a vicious cycle that helps no one in the end, especially in our negative savings rate economy. If we want a raise, that will cost the company we work for more. Eventually, that will raise prices, which will in turn make people need more money. Even though companies will make more in numerical terms, there will be about the same or maybe even less made in comparison to the year before after taking out inflation. In turn, the government would likely have to print out even more money to meet the demand for money. This lowers the actual purchasing power of our money. And the cycle continues...

Though I THINK I have found the one class of people that inflation is ok for... major sports players. Check this out, courtesy of Baseball Almanac. A mere 31 seasons ago, Michael Jack Schmidt of the Philadelphia Phillies (end Harry Kalas impression... and anyone who has heard his voice knows it) was the highest paid baseball player at $500,000 per season. Nolan Ryan was baseball's first million dollar per season man for the 1980 season. For 2006, the AVERAGE was JUST under $2.7 million! Also mentioned is that they New York Yankees' average (the highest salaried team) was slightly under $7 million (1992 was the first individual to hit $7 million, Ryne Sandberg of the Cubbies, a mere 15 seasons ago!) $327,000 was the MINIMUM. (And I believe 3-5% is the standard raise for most workers?)

Bottom line... high inflation is bad. Granted, the example at this website on Brazil is EXTREME... but it's a good indication of what would happen with high inflation and why people should be against it.