The stealthiest tax that no authority wants you to know about.
Inflation is said to be how much the amount of goods and services increases year on year but some say that a more accurate definition of inflation is the amount of money printed by a central bank. The increased price in goods is just a result from that printed money entering the financial system. This is how it works…
By increasing the amount of dollars/pounds/yen in circulation and flooding the markets with liquidity, people “feel richer” and it encourages consumerism – people to go spend. This is exactly what happened during the 2020 Pandemic. In the whole history of financial markets, there has never been such a short recession after the markets crashed in March, as they recovered after just only 2 months!
The Federal Reserve (US) and other central banks panicked as people saw their net worth and pensions decrease by 20% in a matter of weeks in the stock market – poof! – so the banks knelt on the printing press button to start creating government-backed currency out of thin air – aka “fiat money” – and haven’t stopped since.
Moreover, they dropped helicopter money – stimulation cheques – into everyone’s bank accounts to encourage people to buy things so that the market would pick back up again and guess what? It worked. But as the saying goes: “The Fed just kicked the can down the road” and when will be our comeuppance? Well, 2021: inflation.
Most banks around the world had struggled to raise inflation to 2% – their annual target – but suddenly the cat had been let out of the bag, lots of money was flying around, people were throwing money at Amazon, Deliveroo and Robin Hood like it was going out of fashion and this caused prices across the board to sky rocket.
Now inflation stands at about 7% but that’s with the Government ‘fudging’ the numbers and not including fuel and food. So if you actually included those basic human needs then a more accurate figure is actually around 15%, which is huge! That’s a double figure increase in everything you buy, which is simply not sustainable.
You might have noticed that your food shop, petrol, gas bill, rent and house prices (need I go on?) have all jumped up to the point where it’s beginning to hurt.
Prices can only go up so much until people can no longer get by and that’s usually then followed by a correction. When this will happen is anyone’s guess.
Furthermore, what accelerated this inflation is a break in the supply chain because COVID-19 shut down the entire world. It’s taking a while to get things ordered to your house because ports and manufacturing facilities aren’t back at full capacity yet, which has been further exacerbated by labour shortages.
When you have an increased pent up demand for goods but the supply can’t meet this demand prices go up. However, it has been argued that with the world reopening, as Omicron didn’t amount to much, then this could increase supply and allow prices to stabilise (BUT crucially not return to pre-pandemic levels).
As you can see there is a lot to this but I’ve only just scratched the surface so more will be discussed over the next few posts.
Watch this ONE minute video on inflation explained (how could you not?).
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This blog is for educational purposes only and should not be construed as financial advice. It is purely opinion-based.