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Inflation: Governments
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Inflation is a hidden tax on consumers. Over time it is added to the cost of each item purchased as each unit of currency buys less and less until it is worthless. By changing the way the CPI is computed, government is able to create an illusion of stability.
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The episodes of extreme inflation took a standard form. First the government started building up the army and undertaking public works projects. These projects increased expenditures drastically and the government raised tax rates. But the higher tax rates encouraged tax evasion and discouraged economic activity. The tax base diminished and soon the tax needs exceeded the tax capacity of the government. The government then resorted to debasing the coins of the realm.
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Monetarists emphasize increasing interest rates (slowing the rise in the money supply, monetary policy) to fight inflation. Keynesians emphasize reducing demand in general, often through fiscal policy, using increased taxation or reduced government spending to reduce demand as well as by using monetary policy. Supply-side economists advocate fighting inflation by fixing the exchange rate between the currency and some reference currency such as gold. This would be a return to the gold standard. All of these policies are achieved in practice through a process of open market operations.
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This is an inflation calculator for adjusting costs from one year to another using the Gross Domestic Product (GDP) Deflator inflation index. This inflation calculator is based on the inflation rate during the US Government Fiscal Year, which begins on October 1 and ends on September 30. This inflation calculator will compute inflation for any years from 1940 to 2009.
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People sometimes call inflation a special way of "taxing" a country's citizens. This is a dangerous opinion. And it is wholly untrue. Inflation is not a method of taxation, but an alternative for taxation. When a government imposes taxes, it has full control. It can tax and distribute the burden any way it considers fair and desirable, allotting a larger share of the tax burden to those who are better able to carry it, reducing the burden on the less fortunate.
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Kaza, who believes the government is measuring inflation more or less accurately, makes an intriguing argument. There are questions it doesn't answer. The cost of living in Manhattan—and of luxury goods—has been rising for a long time, so why have concerns over runaway inflation arisen only recently? Also, how to explain that the costs of many of the things that rich people like to buy (computers, plasma televisions, fractional jet ownership, cell phone service, laser eye surgery) have been dropping?
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