Most People Are Unaware That Inflation Is Compounding – Investment Watch

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However, the MSM claims that only 10% inflation is fixed on a monthly basis. That’s why they are attempting to divert your attention with COVID AND WARS.

The point is that it is compounding rather than fixed.

It grows exponentially over time.

Inflation occurs when the Federal Reserve prints too much money to chase fewer goods in the economy.

Inflation is Compounding Interest Working Against You

Despite these facts, however, there are many important aspects of inflation that are either misunderstood or ignored, especially when it comes to how inflation affects lower-income Americans:

  • Low-income Americans generally experience higher inflation rates than high-income Americans. Inflation indices like CPI-U attempt to measure price inflation for the average consumer. But most people are not average, and therefore, a single consumption “basket” does not reflect the way most Americans experience inflation. In particular, lower-income Americans have generally experienced higher inflation rates because housing represents a higher proportion of their spending, on average.
  • Even modest inflation, compounded over time, disproportionately harms low earners. Most economists regard the period from 1982 to 2020 as a period in which the Federal Reserve managed inflation well, by keeping it stable and low. But because lower earners’ consumption baskets lead to slightly higher inflation rates, over time, the compounded effect of these higher rates is significant. From 1978 to 2021, the compounded effect of inflation was 43 percentage points higher for the lowest income decile vs. the highest.
  • When adjusted for purchasing power, the impact of inflation on low earners is even worse. If the annual price of groceries for a family of four rises from $3,000 to $4,000, a wealthy family is far more able to absorb the extra $1,000 in costs than the working poor. If we examine the absolute impact of inflation, we find that from 2004 to 2020, earners in the bottom decile experienced inflation that was 71 percentage points higher than for the top decile, on a compounded basis.

These results mean that, even in an era of “modest” inflation, low earners need to experience faster wage growth than high earners do in order to keep pace. In general, the reverse has happened: high earners’ incomes have grown much faster than those of low earners.

Our work suggests that the Fed should reconsider this shift. Given the compounding effect of even modest inflation on lower-income Americans, there may even be benefits to reducing the Fed’s inflation target below 2%. The Federal Reserve’s mandate should be understood as striving to achieve stable prices for all Americans — not merely the wealthy few.

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