Inflation Is a Tax Increase
The 3 ways taxes go up when inflation is high
Although most people understand how much more complicated personal finance can be in a high inflation environment, few people understand the massive transfer of wealth that takes place as inflation increases.
I wrote a little bit about this in What Is Consumer Price Inflation?, in which I step you thru the calculations necessary to understand the impact of inflation on calculating real rate of return, and describe how high inflation favors borrowers (typically young people) and the expense of lenders (typically older people).
Here’s an excerpt:
Inflation punishes savers.
To save money is to postpone spending it. Because a period of high inflation means rising prices, the people who postpone spending will not be able to buy as much with their savings when they do decide to spend them — because prices are going up.
The converse is also true: inflation rewards borrowers, because borrowing is the opposite of saving. When you borrow money to spend now, you have to pay it back later. During periods of high inflation, you pay it back with dollars that are worth less, so the sacrifice you make to repay the debt is not as great.
Interest rates typically adjust to reallocate…
