As time passes, the value of money declines.

Consumer-price inflation rose to 8.6% in May, its highest in forty years. This tax on households and businesses threatens the overall health of the U.S. economy. Deficit fiscal spending and supply shocks and Russian invasion are the primary causes of the current historic inflation.

Inflation is defined as the decline of purchasing power of the U.S. Dollar over a certain period of time. Inflation is usually expressed as the change in prices over a one-year period.

Purchasing power means how much your money can buy—its “buying power.” You lose purchasing power when prices go up (inflation) and gain purchasing power when prices go down (deflation). Inflation changes the value of a currency over time.

Inflation, risk and opportunity cost together reduce the value of the dollar as time passes. And, when inflation increases, the purchasing power of the U.S. Dollar decreases.

Inflation is rampant, the Federal Reserve seems poised to raise interest rates even higher than previously expected, financial markets are free falling, and there are fears of recession in the air. All this signals economic pain ahead for Americans.

A recession is my no means certain, with a strong jobs market and consumers still flush from pandemic fiscal government handouts. But inflation is sapping consumer and business confidence.

A tax increase would reduce investment and further restrict supply, which would arguably increase inflation.

Inflation is a cost spread over every American. Unemployment, a byproduct of a recession, lands especially hard on specific Americans and American families. Thus, it natural for economists to accept a little more inflation to protect employment and strive for a soft landing.

Blossoming federal role in directly supporting the consumption of a vast number of Americans is a primary driver of fiscal deficits and persistent inflation.

• 75 million receive a combination of Medicare, Medicaid and Social Security
• 98 million receive veteran and retired federal government benefits, college aid, rental assistance, Obamacare, food stamps, etc.

These transfers are financed by chronic fiscal deficits. To remedy the problem, politicians would face the career ending choice of benefit cuts, tax hikes or increase borrowing regardless of the worsening effect in inflation.

If prompt and effective actions are not pursued by the Federal Reserve and Administration, the nation may revisit the Stagflation of the 1970s which persisted more than a decade with great consequences to society and the economy.

References:

1. https://debtinflation.com/how-does-inflation-impact-purchasing-power/
2. https://www.acorns.com/money-basics/the-economy/what-is-purchasing-power-and-how-does-inflation-affect-it-/