Inflation Swindles Almost Everybody

“If you feel you can dance in and out of securities in a way that defeats the inflation tax, I would like to be your broker — but not your partner.” Warren Buffett

During 2022 Berkshire-Hathaway’s annual shareholders meeting, chairman and CEO Warren Buffett stated, ‘Inflation swindles almost everybody’. Inflation is the decline of purchasing power of the U.S. dollar, the U.S. unit of currency. The rising prices of goods and services, often expressed as the inflation rate, means that a unit of currency effectively buys less than it did in prior years.

Buffett commented that inflation “swindles” equity investors. He elaborated that: “Inflation swindles the bond investor, too. It swindles the person who keeps their cash under their mattress. It swindles almost everybody.” Since inflation is largely a result of loose fiscal and monetary policy. This policy artificially inflated demand and effectively caused a supply/demand imbalance — the cure for which was rising prices to try and lower demand.

He stated that inflation also raises the amount of capital that companies need and that raising prices to maintain inflation-adjusted profits is not as simple as it may seem.

In Buffett’s opinion, “only gains in purchasing power represent real earnings on investment. If you (a) forego 10 hamburgers to purchase an investment; (b) receive dividends which, after tax, buy two hamburgers; and (c) receive, upon sale of your holdings, after-tax proceeds that will buy eight hamburgers, then (d) you have had no real income from your investment, no matter how much it appreciated in dollars. You may feel richer, but you won’t eat richer.”

Additionally, “High rates of inflation create a tax on capital that makes much corporate investment unwise – at least if measured by the criterion of a positive real investment return to owners”, states Buffett.

In a 1977 Fortune magazine article, Buffett conveyed his views on inflation: “The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital.”

He opined that the best protection against inflation is investing in your own skills.

During the shareholder’s meeting, Buffett observed that massive fiscal and monetary economic stimuli during the COVID-19 pandemic are the major reason for high inflation today: “You print loads of money, and money is going to be worth less.”

Buffett views inflation as a necessary consequence of the massive fiscal and monetary stimuli, which “artificially inflated demand and effectively caused a supply/demand imbalance”, to get the U.S. out of what could have been a COVID-19 induced depression.

“In my book, Jay Powell is a hero,” Buffett stated. “It’s very simple, he did what he had to do.”

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