The Importance of Adjusting for Inflation

Understanding the need to adjust for inflation is crucial for maintaining economic stability, ensuring the value of money, and protecting currency value.

The Role of Inflation in Economic Comparisons

Inflation is a measure of the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. When we talk about inflation adjustment, it allows us to compare prices at different periods in history, making it easier to analyze economic trends over time. This is essential for policymakers, economists, and businesses to understand how the value of money has changed over years and to make informed decisions.

Downward Adjustment and Its Benefits

Downward adjustment of inflation is necessary because it helps protect the money's value, control costs, and maintain exchange rates. For instance, when inflation is high, the value of money decreases, which can lead to increased prices for goods and services. On the other hand, when inflation is low, money retains its value better. Therefore, governments often implement measures to control inflation, such as reducing money circulation, introducing credit curbs, and increasing the supply of goods by encouraging more production.

Adjusting for Inflation vs. Controlling Inflation

It is important to clarify that while adjusting for inflation is a necessary practice, controlling inflation itself is a complex task. It is often argued that there is no direct dial to adjust inflation, as it is more of a result of various economic policies and market dynamics. Inflation can be addressed through both inflationary and deflationary policies, depending on the economic environment.

Historically, every economy has overestimated its ability to control inflation, with notable examples from the past such as the inflation rate goal of 4% in the 1990s, which was considered low at the time. When we observe the current economic landscape, it is unclear whether we are seeing a new economic era or simply experiencing the longest period of low inflation and high debt since the 17th century Dutch Tulip Mania. During this period, a significant bubble in tulip bulb prices led to a massive market crash, which serves as a historical cautionary tale.

In recent years, the United States has significantly increased its national debt under Bush and Obama administrations, yet it has also collected record tax receipts. Furthermore, the quantitative easing (QE) programs from 2008 to 2014 were estimated to have printed trillions of dollars, although the exact amount remains unclear. The government's official statement about the monthly QE injection was 40 billion dollars, but this figure is likely an understatement. Currently, the United States is paying about 270 billion dollars annually in interest payments, which is expected to balloon to almost a trillion dollars if we return to the deflationary policies of the 1990s. If we return to the high inflation rates of the 1970s, the annual interest payments could exceed 3 trillion dollars, which would far surpass the total federal budget of 3.8 trillion in 2015.

Therefore, the importance of adjusting for inflation lies in maintaining the stability and value of currency, protecting the purchasing power of money, and ensuring that economic policies are consistent with long-term economic goals. It is crucial for policymakers and businesses to continually monitor and adjust for inflation to avoid economic crises and ensure sustainable growth.