“The first rule of economics is scarcity. The first rule of politics is to ignore the first rule of economics.”
Which is the classic and best understood definition of inflation:
- The description of how big a fish that you caught the last time you were out
- What it takes to make your exercise bike into a real bike
- Too many dollars chasing too few goods and services
So yes, there could also have been answer D) All of the above, but let’s focus on answer C.
Undoubtedly inflation in the US and globally has proven to be more than transitory. And in fact, what is reported as headlines, such as “Inflation Creeps up another 0.5% in December” is pretty deceiving in our current economy. Let’s look at an example.
First, let’s confirm a fact. What does it actually mean when we are told that the inflation went up 7%? It means that compared to the same month one year ago, the cost of goods and services has increased by that percent – let’s stay with 7% as the example. But what if we’re already 15 months into this economic turmoil? The numbers for the US:
November 2021: 6.8% November 2022: 7.1%
Do you get it now? Here in 2022’s case, inflation is 7.1% SINCE NOVEMBER 2021. I can’t tell you a calculation for additive or compounded, but I can tell you we’re being deceived if we believe that November 2022 is only 0.3% more than November 2020.
Remember this chart from last year? Still one of my faves — I like graphs and charts that tell a story. I found the one below on-line, it’s from the St. Louis Federal Reserve Bank. It charts the inflation rate and associated wage growth by month during two specific periods, January 1960 through June 2009, and July 2009 through September 2015.
Jim Harvey is a Managing Partner with Alliance Compensation LLC, a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. He has over 40 years of experience in corporate leadership roles and consulting, and lives with his wife and four dogs in Sherwood, OR.