Inflation is like the weather.  To paraphrase Mark Twain, “everybody talks about it, but nobody does anything about it.”  Biden tells us he’s fighting inflation, and it seems as if we hear every day in the news about the Fed leaving interest rates unchanged to fight inflation.  But prices are still high and rising.  The latest numbers just released show that prices year to date are still rising faster than expected.

It’s true that two years ago, inflation peaked at around 9%, and today, it’s hovering in the mid-3s.  So why haven’t prices come down?  It’s a common misconception, often fueled by the crowd on the left alleging corporate greed, but inflation isn’t the price level — it’s the rate of increase in prices.  A reduction from 9% to 3% doesn’t mean that prices should come down 6%; it means that now they will go up at 3%.  Corporations may be greedy, but that has nothing to do with the inflation rate.  The government, on the other hand, plays a significant role in managing inflation and deflation through its monetary and fiscal policies.

Prices going down — deflation — on the other hand, is a different story.  When prices actually decline, corporations often resort to cost-cutting measures, usually at the expense of wages and benefits.  And if the dollars in your pocket are worth more because of deflation, your loans or debts become more costly in real terms.  This is why most economists agree that deflation is not a good thing.

Think of deflation this way: if an apple costs $1, and you borrow $1 from someone, promising to pay it back in a year with no interest, if prices are stable, you’ll pay back $1 — exactly one apple.  But if, because of deflation, apples at year-end cost only 95 cents, and since you owe $1, you are essentially paying back 1.05 apples.  In real terms, your borrowed apple costs more than one apple when you pay it back because of deflation.

No, a little inflation is a good thing.  It keeps wages stable and helps borrowers avoid falling behind in the real value of their debts.  But there’s a dark side to inflation as well.  Milton Friedman termed inflation “taxation without legislation.”  And he was right — there’s a motive for Biden to talk a good story about beating inflation but actually fueling it.

Flipping the example about deflation, inflation has the opposite effect on debt: it makes it cheaper.  You borrow an apple and pay back less than an apple.  But who really loses, and who really wins with inflation?  Consumers lose, because they now pay more for goods and services — their apples.  However, the government wins because it is a large borrower — the largest — and now pays back its debts with only portions of apples.  Essentially, your loss of spending power is transferred to the government in the form of its reduced real national debt payments.

You’re being taxed by the amount of inflation, and the government is using it to pay its ever-growing national debt.  Although the White House talks a good story about fighting inflation, it continues forgiving billions in loans, hamstringing domestic natural resource production, and deficit spending — all of which are inflationary.  Meanwhile, the Fed sits by, hinting that it will drop interest rates, but as painful as it is, it actually should be raising them to curb inflation.

We’re almost two years into the left’s Inflation Reduction Act, a trillion-dollar boondoggle that actually does the opposite.  Hyped by the administration to reduce the deficit by over $250 billion to fight inflation, in fact, the deficit has continued increasing the national debt by over $1 trillion per year.  The act also fuels inflation, increasing government spending by almost $1 trillion on noble-sounding green energy boondoggles.  Behind the scenes, Bidenomics is fueling inflation while its frontman is pitching the opposite in re-election sound bites.

But there is a silver lining to inflation for those with consumer debt.  Just like the government, you’ll be paying back only a fraction of your borrowings in real terms.  Your car, your house, and even your education will all be cheaper in the future because of inflation if you borrowed to acquire them.  Though it’s not a green light to borrow excessively, and it’s not an endorsement for high inflation, it does offer a measure of relief, even if you are paying more for apples at the store.  As the Greek poet Hesiod wisely observed, “moderation is best in all things.”

Kevin Cochrane is an economist, former senior banking executive, and regularly published national columnist.  He is currently a visiting professor at the University of the West Indies in Barbados and has taught economics for the past two decades in the United States.

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