19 July 2023
The recent University of Michigan survey indicates that one-year inflation expectations rose to 3.4% in July, while the five-year outlook increased to 3.1%. There is a mainstream narrative that is growing all over the financial media: We must accept three percent annual inflation as a success at combating rising prices. This is enough to pivot and return to monetary easing. It is not. Sustained three percent inflation over a decade results in a 34% loss in purchasing power, exacerbating the already dire inflationary environment. Rising long-term inflation expectations not only erode wages and savings but also incentivize the persistence of inefficient sectors while discouraging innovation and technological advancements. Despite this, there is a demand for more quantitative easing, driven by the desire for market bubbles, even at the expense of weak economic growth and declining wages. The reality is that a three percent average inflation rate leads to higher costs of essential goods and services, as seen in the worrisome June inflation reading. Government spending is a key contributor to inflation, as excessive currency creation exceeds real demand. The consequence is the erosion of the currency’s purchasing power. Ignoring the destructive effects on the economy and the middle class in favor of government spending or short-term asset valuation gains is detrimental. A thriving economy should be driven by a prosperous middle class and productive investments, not excessive government intervention and financial assets inflated by monetary easing.