What Bitcoin Did: Inflation’s Hidden Cost

Inflation may most likely appear at the gas pump and grocery store shelves. What that really means is that inflation is particularly dangerous because it’s regressive. Lower-income households are hit harder by rising prices.

While the poorest are being hit hardest, the wealthiest tend to fare well. They either buy assets during a market panic, or own assets that tend to benefit from inflation. In other words, inflation can exacerbate economic inequality.

In a fiat system, monetary purchasing power becomes increasingly destroyed over time. Rising economic inequality is just one outcome.

Another is that lower-income households forego savings, which tend to lose value in real terms. Why save money if there’s no positive reward for doing so, and a loss of purchasing power?

And lacking enough capital to invest, lower-income households tend to be spenders instead. This increases consumption.

These households are now seeing real wage losses due to high inflation. That suggests a further economic drop, given the large role consumption plays in the economy. That could become a self-fulfilling prophecy. As consumption declines, companies lay off more workers, who then cut back. This creates a downward spiral.

With the push by the Federal Reserve to crush inflation, the real question might be the role of inflation targeting may play.

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