Too much money for too few goods and services
Inflation can be seen as a tax, particularly regressive, which weighs more heavily on people with lower incomes and / or assets.
By Bill Bergman, Research Director, The truth in accounting:
as we have previously noted, the Federal Reserve’s “M2” monetary aggregate began to grow much faster than the “GDP” measure of economic output in the United States from 2008, in the midst of the financial and economic crisis of 2007-2009 .
With the arrival of the federal government’s massive fiscal and economic “stimulus” policies with a pandemic and government lockdowns, M2 growth has recently grown considerably more than GDP growth.
Earlier this week, the Bureau of Labor Statistics (within the US Department of Labor) reported that the Consumer Price Index (CPI) rose in June at one of its fastest growing rates in more than a decade. Some people have pointed out that year-over-year changes in the CPI may be high recently, in part because comparisons to last year’s levels took place at the start of the pandemic. But in the second quarter of 2021, compared to the first quarter of 2021 and on a seasonally adjusted basis, the CPI increased at an annualized rate of over 8%, which is the highest quarterly growth rate since the third quarter of 1981.
It’s always worth keeping an eye out for alternative measures of inflation, given the estimation problems associated with government statistics and given the source of those statistics.
In this sense, a recent investigation small business by the National Federation of Independent Business (NFIB) delivered a price result that has not been achieved since 1981.
And the monthly price component Supply Management Institute survey purchasing managers in companies rose in June 2021 to its highest level since July 1979.
Inflation can be viewed as a tax, and particularly regressive, hitting harder on those with lower incomes and / or assets. Inflation can be seen as one of the costs of government.
But it’s interesting to consider (and we will, in the coming months) how well the government a) measures headline inflation, and b) covers the cost of government as part of the overall cost of living. .
Government sales taxes end up being covered by the CPI, for example, because this statistic (uncertain and / or wrong in other respects) measures prices, including retail sales taxes. But significant issues arise for other taxes (like property taxes) that count towards the cost of government, as well as taxes that are not explicitly covered by the CPI (or related measures like the PCE deflator). .
During the days of the Great Depression, economists and government developed our modern framework for gross domestic product (GDP, the total value of goods and services produced during a given period). There were four main components (C + I + G + NX) – consumption expenditure, investment expenditure, government expenditure and net exports.
Some have interrogates if the G (government spending) belongs in it, from an opportunity cost perspective, because government spending is based on taxes or borrowing money that could have been spent by someone else.
But let’s put this interesting debate aside and see if what’s good for the goose is good for the gander. If GDP were to include government spending, our government would have to do a better job of including the cost of government in its cost of living measures. By Bill Bergman, Research Director, The truth in accounting
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