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Inflation in the real world is a tricky thing to understand. Everyone saw the OMG 9.1% inflation print from the US yesterday, but it's hard to comprehend the real-world impact of a single number like that.

We can all read textbooks and look at economic models but frankly that's really boring and gives cookie cutter answers like this from Investopedia 👇

Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time.

The rise in prices, which is often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.

While there's nothing wrong with that as a definition, what does it mean in the real-world?

Let's grab some hot takes and rip them apart as examples 👇

Maths. This one's referencing the 1.2% monthly increase. Let's focus on the annual reading as a 'fairer' measure. If you're paid $100,000 one year, and 9.1% inflation hits, you'll need a raise to $109,100 the next year just to maintain purchasing power.

That presumes that you're experiencing inflation at exactly the average, (which is unlikely for obvious reasons), so it's a bit rough around the edges...

Anyway, it's not just your wages that are being devalued by inflation...

He's bang on with the tone deafness. Nobody thinks about this, nor have they really needed to for the past two decades. Yet it's clearly true.

Every dollar received as a loan/mortgage had a certain amount of purchasing power when it was lent. That same dollar returned to the lender has a lot less purchasing power now. Which, in isolation, is a win for the loanee.

And it's also why you see charts like this, usually alongside people crying about 'sound money' 👇

Solution. Earn more dollars. (duh)

Even though a single dollar has lost purchasing power, that doesn't mean that the indvidual has lost purchasing power.

Reality looks something like this 👇

Now, I'm pretty sure those figures aren't exactly right and you've just witnessed two chart crimes in a row but it illustrates the point well.

Purchasing power at the individual level matters more than the purchasing power of a unit of currency. For the individual, it's fine if a currency devalues.
As long as you can get more units, you can keep up or get ahead.  

That's not quite the case right now according to the Atlanta Fed wage tracker, which suggests that, on aggregate, wages aren't keeping up with inflation.  👇

But the Bank of America data contradicts the Atlanta Fed, and it's certainly not true for everyone 👇

So maybe wages are increasing above the rate of inflation. And for the young'uns they definitely are.

And if you dig a little deeper, something else is going on too. 👇

"There is less of a slowdown in growth for production & nonsupervisory workers"

In normie language, that means that workers at the bottom of the organisation (and pay-scale) are faring better relative to their managers and supervisors.

So, the lowest paid workers are getting pay increases closer to the rate of inflation, AND the younger generation are doing equally well (or better) and actually beating inflation.

What do these two groups have in common?

Stealing the economist term, a higher marginal propensity to consume (MPC).

Basically, the younger generations are less likely to save and more likely to spend (consume). 👇

The Consumption Life Cycle

An economic model that’s especially useful right now...

MacrodesiacTim Vollans

And it's the same for lower-paid workers who usually earn just about enough to keep their heads above water. Every cent gets spent, nothing gets saved.

So when we see this 👇

Yes, it means the public is still spending, but that data needs to be adjusted for inflation to get the proper context. This chart is from March, (so not the most up to date) but you get the idea 👇

The total value of the goods sold increases as the value of the currency decreases. Doesn't mean more goods were sold.

Then there's the tax angle.

Unless your portfolio's down on the year...

The same applies to income tax too.

Great, you got a pay rise! Now pay us more... 👇

Bringing it all together, inflation's a tough challenge. But it's not pure misery for everyone all of the time.  

Debts are devalued, wages increase, and prices go up. Right now, that's happening faster than usual. But high debt loads and stagnant wages at the lower end of the pay-scale have been a problem for the past decade.

And maybe this is the start of the generational rebalancing mentioned here

• The great political divide of the 2020s will be generational: the old fear inflation, and the young need it

A brand new economic path... or is it just transitory?

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Unbiased Take: The best guide to inflation you'll find anywhere 👇

An idiot’s guide to inflation

Inflation 📈 It seems like such a simple concept... but it can also make you feel like an idiot.

MacrodesiacTim Vollans

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