Remember inflation during the 1970’s?  It was a scary time, with prices rising so much faster than income.  The Fed had to intentionally throw us into a nasty recession in 1980, before taming inflation with record high interest rates.  If you can remember that, your hair is now gray.  Yet, inflation teaches a lesson to be remembered.  Inflation can be crushed.

There are many ways to measure inflation:  the Consumer Price Index, the Producer Price Index, Personal Consumption Expenditures, “Median CPI” by the Cleveland Fed, “Sticky CPI” by the Atlanta Fed, and the Underlying Inflation Gauge” by the New York Fed, etc.  The differences mean little now, because all of them are indicating a pick-up in inflation — not runaway inflation yet, but definitely something to watch.

Inflation is not all bad.  One good thing about inflation is that it is not deflation, which is much more difficult to control than inflation.  We know a good old-fashioned recession will fix inflation, while deflation is much more pernicious.  It was only five years ago that the Fed was genuinely worried about deflation, despite the most stimulative monetary policy in history.  Fortunately, the Fed kept prices from falling or deflating.  While it may sound like empty rhetoric, it is important that inflation is better than deflation.

Another benefit of inflation is managing our dangerous level of national debt.  Ignoring myriad underwriting details, the amount of mortgage debt you can handle is a direct function of your income.  For example, if your income is $100 thousand, your mortgage payment should not exceed 30% or $30 thousand annually.  However, if your income doubles, your debt service drops to a healthy 15%.  The same math works for the economy.

Most economists of the Austrian school believe there is a downward economic spiral that begins when national debt passes 100% of national income or GDP.  That ratio was 105.4% last year but is rising more rapidly now, due to the stimulative tax cut.  That is not the highest debt-to-GDP ratio in history – 118% – following World War II.  The joy of inflation is that GDP normally rises faster than the level of national debt.  This is known as “inflating the debt away.”  The amount of debt doesn’t go down, the income or GDP goes up.

Given the inability of our Congress to make painful decisions, our only solution to manage our national debt is to bring back inflation.  While it is a double-sided sword, it is the only sword we have.  We need inflation!  Interest rates are certainly going up but not enough to stop something we need so badly . . . Inflation!