Inflation Beast Is Back…Don’t Panic Just Yet…

Now the challenge with inflation is that it increases the cost of living. Inflation when uncontrolled can be very damaging. And if economics is primarily about human behavior, then uncontrolled inflation damages consumer and business confidence which are the platforms upon which economics rests.

And inflation- according to the USA Federal Reserve – is back.

The reason for the return of inflation has been put down to many years of QE Stimulus: the pumping of cash into the global marketplace by Central Banks in an effort to prevent financial collapse in 2008, to today’s pandemic driven stimulus. The present QE is an effort to avoid recession and even depression from a world terrified by COVID 19.

A depression would lead to business shutdowns, bankruptcies, and millions of job losses. Hence policymakers use the instrument of QE- increasing the quantity of cash in the marketplace- through the selling of government bonds and various treasury instruments to investors, in an effort to drive greater consumer spending and prevent business insolvency. 

Government Bonds are the most secure investment in the global marketplace.

In the Virgin Islands, the idea of government stimulus is an analogy of what the US Federal Reserve attempts to achieve in activating the instrument of Quantitative Easing to prevent a US Depression.

Today, there is an imbalance in the cash in the western marketplace: more cash than the goods and services the cash buys; hence rising prices. This is what is driving inflation.

Can consumers protect themselves against inflation? The preceding is not a simple question with a simple answer.

Any income increase that matches the cost of living increases that inflation generates does the job of protecting the consumer. But for those on incomes that cannot be adjusted for inflation which means the majority of consumers, inflation means higher prices and higher costs of living.

For residents on fixed budgets- retirees, employees on fixed wages, and so on- inflation means life gets more expensive.

For residents who can push the increase in inflation on others such as their customers, clients, tenants, home buyers, hotel guests, travelers, these people can cushion the effects of inflation.

Investors have ways they can protect their wealth from inflation; such as moving their wealth into more secure investments: established index funds, government bonds, treasury notes, and such.

Historically land prices rise with inflation and landowners may be protected from inflation.

However interest rate rises frequently accompany the Inflation Beast. Home and business owners with mortgages and commercial loans that are not fixed may get a shock increase in their interest payments. The preceding is negative fallout from inflation for consumers.

Who wins and who loses in the inflationary environment? If the Federal Reserve increases interest rates, then rates worldwide may go up. That means all of us who borrow on car loans, home and commercial mortgages, bank loans, and credit cards, may see life getting more expensive.

Savers on the other hand may see their cash in the bank receive greater returns as rates rise.

There is a catch 22: Savers may see their rate of returns rise only to spend that extra cash on more expensive goods and services.

Inflation is a complex beast. 

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