Inflation hurts lower-income earners and retirees or others who are on a fixed income.
Since the country has not experienced the ugly nastiness of long-term inflation in more than four decades, the majority of Americans either never experienced it or have forgotten about it. It is starting to appear as if a long-term inflation problem is brewing. It also appears as if both the Biden Administration and The Federal Reserve (Fed) will accept high inflation.
The Fed position is most perplexing. Historically, and in nearly every instance, the Fed stays in front of inflation. This time, they are admitting they will be behind. If inflation continues to be high, actions taken afterward must be very drastic, as was the case in 1981.
The Biden Administration has set “curing real or perceived social injustices” as the primary goal of economic policy. As such the huge amount of spending and taxes necessary to achieve those goals will be inflationary and could stagnate the economy. But the Biden Administration reasons that is simply the price to be paid.
High, long term inflation creates many nasty problems for nearly everyone. The most pressing problem is workers’ incomes. If an employee receives a 5% raise and the inflation rate is 7%, the employee correctly reasons there is a loss of purchasing power. Next year’s raise has to exceed the inflation rate. “I know the company is charging higher prices. They can afford it.”
That thinking leads to a classic wage-price spiral, which is difficult to reverse. In fact, the labor negotiations often get very ugly. Strikes will result from many of these negotiations.
Inflation hurts lower income earners and retirees or others who are on a fixed income. Although Social security payments are indexed to inflation, usually the cost-of-living increase is less than the inflation experienced by retirees.
Those retirees who have a pension or who have income from investments, typically assume a 3% or less inflation rate. Based on that they determine how much they need to draw each year from their retirement account for living expenses. Higher inflation means more money will have to be taken from a retirement account.