Those old enough to remember the U.S. economy during 1970's will remember the panicky headlines about runaway inflation. Do you remember the stories about elderly women eating dog food? Do you remember Gerald Ford's WIN Campaign, which meant Whip Inflation Now? Nobody wishes for a return of that level of inflation again!
But, a little inflation is a big blessing, and it looks like we're getting a little. The Producer Price Index (PPI) was just released and shows 3.1% over the past year, while the Consumer Price Index (CPI) showed 2.8%. Of course, the recent rise in oil prices boosted both indexes somewhat, but the "core" level of inflation was still well above the 2% goal of the Fed. In fact, a little more would be good!
Why is inflation a good thing? In a macro sense, it reduces the burden of debt. The rule-of-thumb is that national debt should not exceed the GDP. Our national debt of $21 TRILLION is a little over 100% of GDP but rising. (The 2019 deficit alone is expected to add another 4.5%.) To bring that ratio back below 100%, we need to inflate GDP. If you worry about the level of national debt (and I do), then pray for more inflation.
At the corporate level, the same thing happens. Whatever the level of debt, it is being paid with cheaper dollars, because inflation devalues currency. As an example, if the level of debt payments is fixed while income is driven up by inflation, the debt payments require a smaller and smaller percentage of the rising income. Likewise for the consumer level. A little inflation is your friend!
Economists argue incessantly about the desired level of inflation, but all agree anything below 2% is bad, and anything above 8% is bad. It is a big sweet spot, and it will be sweet to "inflate away" our debt.
But, a little inflation is a big blessing, and it looks like we're getting a little. The Producer Price Index (PPI) was just released and shows 3.1% over the past year, while the Consumer Price Index (CPI) showed 2.8%. Of course, the recent rise in oil prices boosted both indexes somewhat, but the "core" level of inflation was still well above the 2% goal of the Fed. In fact, a little more would be good!
Why is inflation a good thing? In a macro sense, it reduces the burden of debt. The rule-of-thumb is that national debt should not exceed the GDP. Our national debt of $21 TRILLION is a little over 100% of GDP but rising. (The 2019 deficit alone is expected to add another 4.5%.) To bring that ratio back below 100%, we need to inflate GDP. If you worry about the level of national debt (and I do), then pray for more inflation.
At the corporate level, the same thing happens. Whatever the level of debt, it is being paid with cheaper dollars, because inflation devalues currency. As an example, if the level of debt payments is fixed while income is driven up by inflation, the debt payments require a smaller and smaller percentage of the rising income. Likewise for the consumer level. A little inflation is your friend!
Economists argue incessantly about the desired level of inflation, but all agree anything below 2% is bad, and anything above 8% is bad. It is a big sweet spot, and it will be sweet to "inflate away" our debt.
