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Why Frugal-Minded Savers Hate Inflation

From CNN/Time.

"Inflation helps debtors and spenders at the expense of creditors and savers."

That's because the purchasing power of each dollar is diminished by the percentage of inflation. $1.00 minus the current inflation rate (say 2% for example) makes $1.00 worth .98, meaning the retailer now has to jack up the price of products by .02 to recapture each full dollar value spent. To get as full dollar's worth of something, you now have to spend $1.02 plus all the taxes that go along with it, raising the taxes as well as the original item price.

Let's take this into double-digits for a better example.

$10.00 (price of item) X 5% (rate of inflation) = .50 (increase in price of item)

$10.50 (new price of item) X 6% (sales tax) = .63 (total price of item)

$10.50 (new price) + .63 (sales tax) = $11.13

Your $10.00 item now costs $11.13--an 11% increase, even though the inflation rate was only 5%.

$11.13 (total price) - $10.00 (original price) = $1.13 more in total

$10.00 (original price) divided by $11.13 (total price) = .89 (two digits)

$1.00 - .89 = 11% (the inflation rate after taxes), making your dollar now worth only .89, so prices have to be raised at least 11% for the retailer to make full dollar values on each item sold, and that's just to break even. Retailers are seeking PROFIT, so you can bet the price increases will be much higher than that to ensure a profit.

Since the original price for the item was $10.00, the sales tax on a $10.00 item would have been .60 ($10.00 X 6%), for a total of $10.60 without inflation. The example total price above of $11.13 - the new total price of $10.60 means you save .53 without coupons, rebates, or store discounts because of an absence of inflation.

Bring inflation back into the picture, and that .53 in savings gets eroded away, and may even cost you out of pocket in the end. Inflation is like an extra tax on your money (courtesy of the Fed), and the higher the rate, the more you get charged in the end for the same item. This is why frugal people tend to spend when prices, taxes, and inflation are low in total--it costs less.

Back to the article.

"There's an argument to be made that inflation—or at least a reasonable increase in our current level of inflation—will help the economy. How? Inflation does two things: 1) It makes your money you have less valuable as times goes past—and so there's more reason to spend it now, which helps the economy. And 2) It makes the real value of debts shrink, or at least become less burdensome—making it easier (relatively speaking) for debtors to pay off what they owe, which also helps the economy (especially if these borrowers take on new debts)."

...

"...you can't really expect anyone—let alone the government—to help you save. There are far more forces out there that'll help you help out the economy by handing over your hard-earned dollars to somebody else.

Throughout the economic crisis, consumers have been sent a mixed message: that individually, it is wise and prudent to save, but that collectively, we need to spend to get the economy humming along again. Such an ambivalent message gives some merit to the theory that the government wants you in debt, mainly because when people are in debt it's good for the economy in two key ways: 1) The fact that you're in debt means you have been buying stuff; and 2) People who are in debt tend to work their butts off in order to get out of debt—or to keep buying stuff."

Inflation is the OTHER way to supposedly bring back the economy when savings and productivity are not possible. The current administration is doing its utmost to ensure savings and productivity aren't possible, and won't be for some time to come--Uncle Sam needs money!

Real total debts are reduced by the amount of inflation, making inflation more attractive to spenders. $100 in debt is reduced by the amount of inflation (say 5%), making the total true debt only $95 instead of $100, and the higher the inflation, the lower the true debt value becomes--paying down your debt without actually sending in money.

Now multiply this times the trillions Uncle Sam owes...not only does inflation diminish spending power, it also diminishes debt and interest on savings.

Posted by Cute at 7:05 PM

Labels: economy, financial (non-tax), taxes