Key Points
- Commerce Department indexes that the Fed relies on heavily for inflation signals showed prices continuing to climb at a rate still considerably higher than the 2% annual goal.
- The stubborn inflation data raised several ominous specters, namely that the Fed may have to keep rates elevated for longer or even have to hike at some point.
- Thus far, the economy has managed to avoid broader damage from the inflation problem, though there are some notable cracks.
This is a logic that seemed intuitive to me as well for a long time. However, it doesn’t make much sense to me anymore when I think about money as simply a representation of wealth or value.
Imagine somebody spending their time and Know-how to build a chair which can be sold at 50$ more than what the original materials are worth. Through their work, they created wealth. The still unchanged amount of money does not accurately represent the currently avaliable wealth anymore and in order to still be redistributed among all goods and services relative to their worth, prices would need to drop (deflation). Now of course, the value of a chair and other goods generally declines over time such that wealth can also disappear, which will cause inflation if it happens excessively. If the government decides to stimulate the economy, ergo creating new money and distributing it, there will still be no inflation if this money is in some way or form used to create the same or more wealth than the equivalent of the newly introduced money. This can easily happen when there are bottlenecks in the current economic situation such as high unemployment or underdeveloped infrastructure.
If of course the new money isn’t used to create more wealth, either because it is pocketed by some entities or because there simply are no people or natural resources available, it will lead to inflation.