Twenty percent of all dollars were created in 2020, and Democrats want to spend trillions more.  A recent poll found that one-third of Americans see inflation and household bills as their top concern, ahead of COVID.  Yet Democrats push for more spending and dismiss the issue of inflation as a Republican talking point.  It doesn't seem as if this strategy will pay off, but perhaps the government has so little incentive to control inflation that even a poll like that doesn't faze politicians.

When inflation rises, the government may collect more tax revenue, and Americans who derive their income from the government get a raise and are thus protected from the worst of inflation.  It's a win-win situation — as long as you're lucky enough to be in the government or paid by it.  Inflation isn't all bad, really; it just depends on who you are.

The Government Can Partially Shield Its Constituents from Inflation

While inflation hits many Americans hard, others have a buffer.  Generally, income that comes from the government is protected from inflation, while income from the private sector is not.  Let's compare three common sources of income:

Public Pensions vs. Private Pensions: If a private-sector employee is lucky enough to have a pension in the first place, the payments are typically not adjusted for inflation.  Meanwhile, state and federal pensions are typically adjusted for inflation.  Federal retirees will either see a 4.9% or 5.9% increase in their annuity payments in 2022.  Private-sector pensioners are not so fortunate.  Consider the effects over the course of retirement: After 20 years of just 3% inflation, an annual pension of $50,000 would be worth only about $27,000 in today's dollars.

Social Security vs. Personal Savings: The Social Security cost-of-living adjustment (COLA) is based on the Consumer Price Index (CPI-W), which measures the cost of goods for urban wage-earners.  Older Americans often see their biggest expenses increase faster than the CPI-W, such as housing and health care costs, so some lawmakers want to change how yearly COLAs are measured.

The Fair COLA for Seniors Act calls for changing the measure to the Consumer Price Index for the Elderly (CPI-E).  It weighs more heavily those goods and services retirees tend to spend more on and will likely mean bigger yearly increases.  Social Security recipients will see a 5.9% increase in 2022 — the largest increase since 1982.  Most workers would be over the moon at an automatic 5.9% pay increase for the new year, and most retirees would think they were being pranked if their bank suddenly told them that C.D.s were paying that much interest.

While guaranteed income from the government may be shielded from inflation, the personal savings of working Americans (including elderly retirees) will lose purchasing power fast in savings accounts and C.D.s so long as the Federal Reserve keeps zero interest rates.

Image by Andrea Widburg.

Unemployment Checks vs. Earnings and Private Charity:

Unemployment checks are indexed to inflation in 33 states, unlike most wage and salaried workers' compensation.  While wages have remained basically stagnant for decades, unemployment benefits can be as high as $974 a week in Massachusetts.

When it comes to private charities, we can only imagine the effects of inflation on their ability to buy essential items and pay their workers a decent salary.  And while Americans are quite generous to charities, it's unlikely that most people sit down and calculate exactly how much more they should give one year compared to the next to make sure their yearly contribution keeps pace with inflation.

The Bottom Line

Imagine how a retired government worker primarily living off a public pension and/or Social Security benefits is affected by inflation versus a younger worker in the private sector trying to save up enough to buy a first house.  One weathers the storm from a bunker, and the other from a house without a roof.

If inflation is a storm, right now the government is sailing into open waters, deciding on the fly who gets access to the limited number of lifeboats when the ship inevitably sinks.  It's not as bad as drowning your passengers, but the result is the same.

Republicans Need to Claim Inflation as Their Issue

Controlling the narrative around inflation will be key in the midterm elections.  Without a clear and simple narrative, we will see the Democrats blame abstract terms — "global supply chains" and "inefficiencies" — for inflation instead of politicians and policies, implying that inflation is a natural problem coming from without rather than an artificial one coming from within.  If Republicans can hold the government responsible for inflation and effectively speak to the resulting problems that affect the average American, their numbers in Congress will rise faster than the CPI.

Laura McLaughlin is a financial planning writer who focuses on tax and monetary policy, Social Security, and estate planning.  She graduated from Boston College in 2017 with a B.A. in English and philosophy.

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