Inflation is a term we hear often, especially when the cost of living seems to increase like what is happening in today’s economy.

What is Inflation?

Inflation is the rate at which the general level of prices for goods and services rises, resulting in a decrease in purchasing power. In simpler terms, when inflation occurs, each unit of currency buys fewer goods and services. For example, if inflation is 3%, a product that costs $100 today would cost $103 next year.

This is a very basic understanding of inflation and is more complex than the above example.

Origins of Inflation

Inflation can occur due to various factors, including:

1. Demand-Pull Inflation: This happens when the demand for goods and services exceeds their supply. When more people want to buy goods than there are goods available, prices increase.
2. Cost-Push Inflation: This occurs when the costs of production rise, leading businesses to increase prices to maintain profit margins. Factors like rising wages, increased costs of raw materials, and supply chain disruptions contribute to cost-push inflation.
3. Monetary Inflation: This is caused by an increase in the money supply. When more money is printed and circulated in the economy, the value of each unit of currency decreases, leading to inflation. This is often controlled by a country’s central bank—in the U.S., the Federal Reserve. This is more so what is occurring in today’s economy.

The Federal Reserve, the Treasury, and Inflation

The Federal Reserve (the Fed) is the central banking system of the United States, and its role includes managing inflation and fostering a stable economy. It does this primarily through monetary policy tools such as setting interest rates and controlling the money supply.

The U.S. Treasury, on the other hand, is responsible for government spending and revenue collection. The Treasury issues bonds to borrow money, which the Fed can buy. When the Fed buys Treasury bonds, it effectively prints more money, increasing the money supply.

Here’s where the problem begins: when the Fed increases the money supply to buy these bonds, it creates inflation. More dollars in circulation dilute the value of each dollar, which means prices for goods and services can rise.

For more in-depth inner workings of how this system works, I would recommend following the work of George Gammon, who has multiple YouTube channels depicting more easily this complex system.

Another great resource that in understanding how the current economic system works should read The Creature from Jekyll Island by G Edward Griffin. G Edward Griffin is also the one who runs Red Pill University and the Red Pill Expo which is a group that fights for all freedoms of Americans through education of how the entire financial/political/governmental system truly works on controlling its citizens.

How Inflation Steals Wealth: The Hidden Tax

Inflation is often called the “hidden tax” because it erodes purchasing power without any direct tax being levied. While taxes are visible and explicitly reduce income, inflation quietly reduces the value of money over time. This hidden tax disproportionately affects the middle and low-income classes because:

1. Fixed Income Erosion: People on fixed incomes, such as retirees, are particularly vulnerable to inflation. Their income does not increase to match rising prices, effectively reducing their standard of living.
2. Savings Devaluation: Inflation erodes the value of savings. Money kept in a low-interest savings account loses its value over time if the inflation rate is higher than the interest rate earned.
3. Wage Stagnation: Inflation often outpaces wage growth, meaning that even though people might nominally earn more money, their purchasing power might decrease if inflation is high.
4. Debt and the Wealth Gap: Wealthier individuals and corporations often have access to assets that appreciate faster than inflation, like stocks and real estate, or can take on debt at low-interest rates to leverage inflation to their advantage. In contrast, the middle and low-income classes, with fewer assets and more income dependency, see their wealth erode.

Overcoming Inflation: Protecting Your Wealth

While inflation is a powerful economic force, there are strategies to mitigate its impact and protect your wealth:

1. Invest in Real Assets: Real assets like real estate, commodities, and precious metals often retain value or appreciate in times of inflation. Investing in these can help protect against the eroding value of cash.
2. Invest in Stocks and Bonds: While not entirely immune to inflation, stocks tend to provide returns that outpace inflation over the long term. Consider a diversified portfolio with a mix of stocks and bonds that adjust for inflation (like Treasury Inflation-Protected Securities, or TIPS).
3. High-Interest Savings Accounts and CDs: Consider placing your money in high-interest savings accounts or certificates of deposit (CDs) that offer rates above inflation, although these can be rare and might come with limitations on access to your funds.
4. Increase Earning Potential: Invest in skills and education that can help increase your earning potential. Higher incomes can help offset the effects of inflation.
5. Reduce Debt: Inflation reduces the value of money over time, but if you’re holding high-interest debt, it can erode your financial stability faster. Focus on paying down high-interest debt to protect against this.
6. Consider Alternative Investments: Investigate inflation-protected securities, like TIPS, or explore other inflation-hedging investments such as certain types of mutual funds, ETFs, or even cryptocurrency, though these come with their own risks and volatility.

Inflation In Your Own Personal Economy

Inflation affects everyone differently. An individual that is wealthy enough to afford the major increase in prices for all their needs and wants has no problem with inflation and most times, benefit from inflation because of the assets they own increase in value with inflation, i.e. real estate values, business revenue, stocks, and many other assets. The middle- and low-income class are most affected because inflation doesn’t allow them to buy the basic needs for survival, such as food, water, energy, and shelter.

Simply, everyone’s personal economy gets affected differently. Every single person has different wants and needs. Some people buy luxuries, some people can’t even afford basic needs. A retired individual living on fixed income benefits that has a paid off home and buys the same basic needs every week is going to have a different perspective and effective inflation rate compared to the individual who is working and supporting multiple family members where their basic wants and needs are changing to support the family members needs and wants, such as changes in pricing for food, consumer goods, and energy. This is why it is a fallacy to believe when the government, Fed, and/or treasury tell you numbers such as consumer price index (CPI), gross domestic product (GDP) or gross domestic income (GDI) are good or bad. Yes, statistics and an aggregation of numbers across the board are important because it is impossible to account for every person’s personal economy being measured grossly across the country, and this is why it is even more important to track your personal economy.

Conclusion

Inflation is a complex and often misunderstood economic phenomenon, but its effects are felt by everyone. By understanding how inflation works and its origins and recognizing the role of the Federal Reserve and the Treasury, we can see how inflation acts as a hidden tax, eroding the value of money and savings over time. However, with careful planning and strategic investments, it is possible to protect your wealth and mitigate the effects of inflation. Stay informed, diversify your investments, and always seek to maximize your earning potential to overcome the challenges posed by inflation.

To the New World and the New You, much success in finding your financial freedom.