Monday, June 23, 2008

Preparing for Double Digit Inflation

We haven't seen double digit inflation since the late 1970s and early 1980s, but it is now a potentially serious challenge. I have seen it first hand in my local visits to the grocery store. I have eight children and the increase in my food bill in recent months has been significant to say the least. Many may not notice a fifteen percent increase here or there, but when you are buying for ten, you notice. Some of my most common items purchased have gone up around 30 percent since this time last year.

Just last week it was reported that there was a 1.5 increase in inflation in May alone. This percentage of an increase is huge for one month. In fact, we normally have smaller increases each quarter. For almost twenty years we have had an annual inflation level of around four percent. There is something seriously wrong here.

Part of the problem is the lack of understanding that exists about inflation. Many like to say "inflation is high prices," which is similar to saying "pneumonia is a high fever." These are both examples of symptoms. What people need is an understand of the cause. Fortunately, the definition is actually quite simple. It is "too much money chasing too few goods." Simply put, the amount of money going into the economy is out pacing production. For example, if in the material world there is only one pencil and only one dollar for exchange, the cost of the pencil would only be one dollar. But if they increased the money supply by an additional dollar, the price would simply double unless they produced additional pencils.

That is exactly what is going on today. The hangover of cheap money policies a few years ago lingers in the economy (e.g., sum prime lending). Then there are the demand side tax rebates that encourage consumption, but not production. These rebates are significantly different from actual across the board tax cuts, which encourage production. Finally, there is the continued growth in deficit spending, which has led to the point today where approximately one third of all government spending goes to only paying the interest on the debt.

We need to hold our elected officials accountable and not allow them to pander to us with short term government programs and breaks with negative long term consequences. Our financial future and the future of our children hinge upon it.
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Kevin Price is Host of the Houston Business Show (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at HoustonBusinessShow.com. Visit the archive of past shows here.

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Anonymous Jack Ace said...

"I remember you, you're the one that mad me blue." The Republican party needs to act Republican again. It is very depressing. We need to be the party of fiscal responsibility again.

7:23 PM  

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