Inflation Over the Next Thirty Years

Inflation is a hidden tax.  The government’s ability to print money and the subsequent inflation results in lower purchasing power for consumers – just as if direct taxes were imposed.

In the past 30-years, prices of just about everything have risen.  The first table below shows that college tuition expenses in particular have been skyrocketing.  But what can we expect over the next 30-years?  The best guess is that inflationary pressure is likely to be lower in the next 30-years as compared to what it was in the past 30 years.  Today, the central banks around the world (with the exception of Venezuela, perhaps) clearly understand that inflation is a headache for the economy that distorts resource allocation and slows economic expansion.  So there will not be irresponsible printing of money to pay government bills.

However, there are very large budget deficits around the world.  These deficits force the government’s hand in printing money.  Even though the central bank is an independent entity of the nation’s treasury departments in the U.S. and other industrialized countries there will always be public pressures to help finance government spending via freshly printed money so as to avoid deep spending cuts or hefty tax increases.

Moreover, countries that do not need to print money (because of, say, a balanced budget and a speedily growing economy) at times are forced to print money in order to keep their currencies stable in relation to other foreign currencies out of fear of losing export demand. For example, America prints money which would weaken the purchasing power of the dollar.  A weaker U.S. dollar in turn will mean more expensive price on Chinese-made products for U.S. consumers.  But China does not want that to happen and hence is forced to match the U.S. by printing its own money in order to keep the Chinese currency at the same proportionate power.  It becomes the battle of printing presses – in just about all countries.  Even Switzerland, historically very cautious of printing, announced a few months ago that it will not stand idly by and let the Swiss franc dramatically appreciate in value in relation to other currencies.  Another equally plausible alternative scenario for the future, therefore, is for higher inflation in relation to past rates.

The tables below show the alternative inflation paths.  Sending kids to college looks like it will be tough.  Home price and housing wealth could either double or triple in value.  Note the 'magical' anti-inflationary power of the 30-year fixed rate mortgage for homeowners.