Those in power are dependent upon obscuring the cumulative impact of inflation.
Imagine that prices rose 10% last year, then another 10% this year, and finally 5% the following year.
Are those prices 25% higher than when we started?
Intuitively, we would say yes, but that is not the case.
Consider it this way.
Take $1000, and multiply it by 1.10.
You get $1100.
To measure another 10% in inflation, you have to multiply $1100 by 1.10.
That gets you to $1210.
Then, multiply that by 1.05.
That brings you $1270.5
If you were to multiply that original $1000 by 1.25, you would end up with $1250.
Rather than prices being up 25%, they are up 27.05%.
That 2.05% point difference may not seem like much, but it is the cumulative impact of inflation. Repeat that over and over, for small and large costs alike, and you can see how that cumulative impact adds up.
Yet, this is rarely talked about, and the true damage caused by inflation is obscured.
Why ‘declines’ in inflation aren’t what they seem
Here’s another thing to consider.
Imagine that the price of a car rises 20% in one year due to inflation.
A $30,000 car last year now costs $36,000.
Now, imagine that the price inflation of that car ‘slows’ to 18%.
That’s great, right?
Yet, the cost of that car goes from $36,000 to $42,800.
So, inflation is ‘lower’ yet the actually cost increase is higher.
The price jumped $6,000 in year one, and $6,800 in year two.
Of course, governments would then start bragging about how they ‘lowered’ inflation and how life is ‘getting more affordable,’ even though that’s not the case.
Since the most widely reported inflation measure is calculated on a year-over-year basis, persistent high inflation often appears to be ‘slowing’ even as the raw price increase is higher. The initial year of large price increase sets a new floor for future price increases, lowering the perceived percentage increase while the actual dollar total grows dramatically.
And, since the cumulative effect is by definition larger as time goes on, the people of a country can become much poorer without the ‘official’ numbers making that clear.
This is the case in Canada, where wage growth lags far behind inflation.
That means each month the purchasing power of Canadians is eroded, and the gap gets bigger and bigger in actual terms.
This is part of why inflation often feels so bewildering for many people. In their bank accounts, they’re seeing the same or even more money, yet it never seems to be enough.
And the more the government floods the economy with printed money and incentivizes productivity through high taxes and onerous regulations, the more the cost-of-living will skyrocket out of control.
All the while, the government will try to gaslight us by studiously avoiding any discussion of the cumulative damage caused by inflation, and expecting people to ignore the economic damage all around us.
Spencer Fernando
Photo – YouTube
***
I am funded by Canadians like you, not the Trudeau government. If you would like to support my writing on a monthly basis, you can subscribe to my long-form, in-depth political analysis newsletter through Patreon:
NEWSLETTER LINK
You can also make can make a one-time contribution through PayPal, or directly through Stripe below.
[simpay id=”28904″]