Sunday, May 26, 2013

How Government Inflation Policies Would Smack the Middle Class

The federal government proposes to use inflation to smack the middle class.  The Federal Reserve has an inflation target of 2%, and some Fed officials, fearing that deflation is around the corner--have recently been openly grousing about how inflation--running just above 1%--is too low.  They want to take away your spending power faster.  One of their primary tools for fueling inflation is to obliterate positive interest rates--or, stated otherwise, to deprive you of interest income.  Your faint memories of the distant past, when interest income actually required you to fill out Schedule B for your tax return, will become entirely ethereal.

Meanwhile, the Obama administration has proposed to use a less generous inflation adjustment (the Chained CPI) for Social Security recipients and federal and military retirees.  The Chained CPI would also be used to adjust tax brackets, with the effect that taxes would be higher than under the currently used CPI.  In other words, the Fed wants to increase inflation, while the President wants less protection for retirees and taxpayers from the ravages of inflation. 

Those whose incomes are middle class or lower (i.e., $100,000 a year or less) tend to be vulnerable to inflation.  They have little discretionary income left after necessary monthly expenses, and consequently, not much of a buffer against increases in inflation.  Retirees are especially defenseless.  Add the heavier taxes resulting from the Chained CPI, and the federal government's inflation policies could effectively reduce middle class and retiree incomes in real terms.

With the sluggish U.S. economy 70% dependent on consumption, it makes no sense for the federal government to deploy inflation as a weapon against those with middle class or lower incomes.  Reduce incomes and people will consume less.  If these federal policies somehow stimulate greater economic growth, it isn't hard to figure who will benefit the most from that greater growth, and it ain't gonna be the lowest 80%. 

The Chained CPI hasn't become law yet, and not all Fed officials want to ignite inflation.  So the worst may not come to pass.  But the lowest 80%, already facing uncertain employment prospects and stagnant wages, really don't need to be squeezed by inflation policies that make sense only to those well-to-do people who are insulated from their impacts.

No comments: