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The Hidden Tax: Inflation

There are taxes, and then there are hidden taxes. And there’s no hidden tax quite like inflation.

This past week, the federal government reported prices in March were 8.5% higher than a year earlier.

That was the fastest rate of increase in more than 40 years.

The median age in the United States is about 38, and about 37 in Georgia, so most people have never experienced inflation to this extent. Add in those of us who are a bit older, but not so much older that we truly remember the “stagflation” of the 1970s and early ’80s, and there’s a sizable majority for whom all this is brand-new.

The surge has come upon us quickly. The inflation rate remained below 3% until last April but has shot up since then, especially over the past six months. You’ve already felt it at the grocery store and the gas pump, in rents and car prices. Wages are rising due to the tight labor market, but they aren’t keeping up.

For an increasing number of Americans, there’s too much month at the end of the money.

Unfortunately, our household cash flow isn’t the only place inflation takes a bite. As our purchasing power declines, so does the value of our savings. The interest rates paid by banks and other institutions remain dismally low. This aspect of inflation is particularly hard on retirees and anyone else on a fixed income.

As bad as inflation is for our personal finances, it can be even worse for our public finances. Yes, some people maintain we can inflate our way out of our massive public debt: Money borrowed when interest rates were lower can be repaid with dollars that are effectively cheaper for the government to obtain.
That’s a tough break, though, for those who lent the money – including a lot of everyday American investors who bought government bonds thinking they were getting some stability and diversity for their portfolios.

And because Washington shows little sign of wanting to cut back on the spending bonanza that is the single largest reason for the increase in prices – “free” money in the name of Covid relief juiced demand for goods and services, but not supply of the same – Congress will keep borrowing. As interest rates rise, so will payments to service all that debt. Some projections have debt payments by mid-century consuming as much as half of all federal revenues and surpassing spending on defense, Medicare or Social Security.

For our state and local governments, the problem could be even worse. They have to balance their budgets, and while revenues are still soaring, costs are bound to increase as well.

The budget for 2023, approved in the legislative session that just ended, began to grapple with some effects of inflation. The state gave raises to a number of employees to prevent a mass exodus from its work force, but that probably won’t be sufficient if inflation continues to approach double-digits. Keep in mind also that when salaries rise, so must the employer’s contributions to those with traditional pension benefits.

Then there are all the things our state and local governments buy, such as motor fuel for their fleets and materials for capital projects ranging from buildings to roads and bridges. Prices are rising for all of those items.

Alas, not even an easing of inflation will fully solve the problem. History tells us that even once the cause of higher public spending disappears, lawmakers are hard-pressed to cut expenditures commensurately. Whenever prices do stop increasing so quickly, they’re unlikely to decrease. Higher spending will become baked into the proverbial cake.

The last time inflation was this bad, the economy had to crash before things could stabilize. That eventually set the stage for a period of growth and prosperity, but the pain came first. We may be looking at a repeat of that chapter of our history.