Inflation has been a problem in the United States for the last several years. Many of the pain can be attributed to the COVID pandemic – whether it has been its impact on supply chain, or the trillions of dollars passed in stimulus to combat this period of economic uncertainty.
Inflation has really peaked over the last several months. Because of this, the government has been trying to find ways to reduce it. On August 7th, 2022, they passed the Inflation Reduction Act. This bill is designed to help decrease inflation by increasing spending. However, many people are skeptical about whether or not this will work.
In this article, we will discuss the effects of the Inflation Reduction Act and what it could mean for you!
What is Inflation?
Before we discuss the details of the Inflation Reduction Act of 2022, it’s important to properly understand what inflation is. Inflation is defined as “a general increase in prices and fall in the purchasing power of money.” This is the current definition, which may be subject to change.
In other words, when inflation happens, your money is worth less because prices have gone up. The price increase of goods and services is caused by the value of the US dollar going down.
Many politicians will blame businesses for raising prices when it is actually the government’s fault for continuing to print money. The Inflation Reduction Act looks for financial punishment through corporate taxes. We’ll explain how this works later on.
Effects of Inflation
Inflation can be a problem for several reasons. For one, it can make it difficult to save money because the value of your savings will decrease over time. Inflation can also make it difficult to afford essential items like food and housing.
For example, if the cost of living goes up by 10%, the value of the goods and services remains the same, however, it’s the value of the currency that has depreciated by 10%.
If you can buy $10,000 worth of goods and services in one year and assume a 10% rate of yearly inflation, the next you will only be able to purchase $9,000 worth of that same good or service. Common law in economics is supply vs demand. When there is more supply of money chasing the same amount of goods and services, the value of money decreases.
To better illustrate this concept, imagine that you make $100 per hour for your service. As time goes on, you realize that you can find $100 bills much easier. They are on the streets, in the gutters, and even in your pockets. You will eventually start to value your $100 per hour job less and value your time more because there are so many $100 bills around.
Eventually, you’d want to increase the cost of your service because that hour isn’t worth $100 anymore. Your one hour is worth more than something that has no scarcity. Why would someone feel comfortable trading something scarce (their time) and energy expended (labor) for something abundant (fiat currency) and effortless (printing more money)?
Inflation might seem like no big deal because it occurs slowly and gradually. However, in economies that experience hyperinflation, the effects can be devastating. When hyperinflation occurs, prices increase very quickly and chaos often follows. For example, in Venezuela, the inflation rate was 2,959.8% back in 2020. Can you imagine how difficult it would be to live in a country where this is happening?
This is why many people are skeptical about the Inflation Reduction Act. They don’t think that increasing spending and adding more money to the economy is going to help reduce inflation. In fact, they think it might make things worse.
We mentioned that corporations are going to experience a 15% increase but individuals will also face Increased tax enforcement. With heavier scrutiny, civilians can expect to pay up to $124 billion in taxes to raise funds for this act.
Why the Inflation Reduction Act Won’t Reduce Inflation
The Inflation Reduction Act is an attempt to help reduce inflation by increasing spending and taxing corporations. Now, doesn’t that seem like a really bad idea? The root cause of inflation is having too much money in the economy and not enough goods and services. So, how is the government going to reduce inflation by punishing the entities that provide goods and services?
It doesn’t make any sense, but that’s what they’re trying to do. They’re hoping that by increasing spending, they will be able to stimulate the economy and create more jobs. They think that this will lead to more money being circulated, which will eventually reduce inflation. However, with more money being printed, likely, inflation will increase over the course of the next several years.
The government is also hoping to reduce the trade deficit, which they think will also help to reduce inflation. By increasing spending, they think that they can boost exports and reduce imports. However, this is also likely to have the opposite effect. This is because businesses would require more money for their efforts since there is more money in the system as we illustrated earlier.
The U.S government plans to raise $739 billion and spend $370 billion on energy and climate change. This would result in a $300 billion deficit reduction. So overall, it looks like they are still going to be increasing the money supply even with this act.
Increased Corporate Taxes
On top of taxing corporations by 15%, many corporations will have to either raise the price of their goods and services or lay off workers. Production would slow down, which would lead to fewer goods and services being circulated (while the money supply is still rampant) and higher unemployment.
In short, the Inflation Reduction Act is not going to help reduce inflation. To be fair, fiat-based economies have cornered themselves into a situation where there is no real solution to inflation. The only way to “fix” the problem is to either get rid of the fiat currency or reduce the money supply (austerity).
The Inflation Reduction Act also seems to be more inclined toward an agenda of addressing climate change than it is toward reducing inflation. It looks like a move from big government to tax society and spend their economic output on subsidies which means less money for the people that have proven to be competent at producing goods and services.
Rather than allow capitalists to reinvest their monetary value to further increase production to combat inflation, the government wants to take that money and redistribute it. The inflation reduction act seems more like a shift towards a socialist society than anything else.
By punishing capitalist entities and individuals for poor government monetary policies, it only seems to be a matter of time before the government runs out of things to tax.
Where are the funds coming from?
Eventually, the money has to come from somewhere and the middle class is always the first to get hit (through inflation). To fulfill the act without revenue from taxes, all they have to do is make a request to the federal reserve and print more money. Which, as we know, only leads to more inflation.
We’ll have to wait and see how this all plays out, but it doesn’t look promising. In the meantime, it might be a good idea to invest in some form of inflation-proofing your life and finances.
How to Protect Yourself from Inflation
There are some things you can do to protect yourself from inflation. For one, you can invest in assets that are likely to increase in value at a faster rate than inflation. However, that does not mean speculating and looking for the “next big thing.”
A better approach would be to focus on inflation-hedged assets. Gold, silver, and real estate are all good examples of this. You can also try to save in a foreign currency if you think your domestic currency is going to suffer from inflation. Some investors bought Bitcoin as their hedge against inflation. This is because, unlike fiat currencies, there is a limited supply of Bitcoin.
Another approach would be to invest in companies that have pricing power. This means that they can increase prices without losing customers.For example, companies that provide essential goods and services are less likely to be affected by inflation. This is because people will still need to buy their products, no matter how high the prices go.
Storing your value in assets that appreciate is helpful but creating multiple streams of income rather can give you some breathing room when it comes to inflation. Side hustles or small businesses as well as assets that produce passive income can help you achieve this.
Investing in yourself and your networks is also a great way to increase your protection against inflation. This is because by improving your skills and adding value to your networks, you will be able to deserve a higher salary. This will help you keep up with inflation and maintain your purchasing power.
The Effects of the Inflation Reduction Act – Summary
In the end, there is no surefire way to protect yourself from inflation. However, increasing your financial IQ will help improve your abilities to weather an economic condition.
Rather than depending on a government, employer or financial advisor to steer you in the right direction, taking charge of your finances is one of the best things you can do to protect yourself against inflation. Our website publishes some of the most insightful articles on personal finance and investing. Check out the content to increase your financial literacy.