Trump is causing real inflation. Here’s why it’s so insidious
Real inflation, distinct from monetary inflation, occurs when the actual costs of goods and services rise, eroding purchasing power without corresponding wage increases. It can result from external shocks like rising oil prices or policy decisions such as tariffs, and often leads to stagflation when central banks respond with tight monetary policy. Unlike typical inflation, real inflation undermines both savings and real wages, making it particularly harmful to economic stability.
- ▪Real inflation occurs when the actual costs of goods and services increase, not just their nominal prices.
- ▪The 1970s U.S. stagflation was caused by real inflation from OPEC's oil price hikes, which raised nominal prices without increasing wages.
- ▪Current real inflation in the U.S. is being driven partly by global oil price increases linked to the Iran conflict.
- ▪President Donald Trump's tariffs are contributing to real inflation by raising the real costs of imported goods.
- ▪The Federal Reserve's attempts to combat real inflation with tight monetary policy can lead to unemployment due to 'sticky wages.'
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Inflation, an increase in the general money price level (“nominal inflation”), causes substantial concern across households, boardrooms, legislative chambers, and central banks alike. It erodes the real value of fixed pensions and annuities and income from bonds. It increases income taxes. It distorts business and government decisions. However, since wages usually go up with inflation over time, the effect of inflation on wage earners is not as significant, right? Not necessarily! It depends on whether the inflation is the typical inflation caused by loose monetary policy (“monetary inflation”) or “real inflation.” Real inflation is particularly insidious because wages do not go up with real inflation.
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