Inflation hits 4% in August: the bill for low rates
Inflation will reach 4% in August after a decade of low rates and public debt. Spain's unadjusted income tax worsens the bill and stagflation looms.
English · Original discussion in Spanish · Published
Inflation hits 4% in August: the bill for low rates
How long does it take for free money to come due? Inflation is approaching 4% in August, yet the social safety net does not cover the shopping basket. The policy of abnormally low interest rates, sustained by gigantic public debt, has left central banks with no room to react. And the six-to-eight-month lag in the transmission of price shocks suggests the worst is yet to come.
Rate hikes come late or not at all
The European Central Bank faces a dilemma: act or keep waiting. The harshest analyses argue that rates should never have fallen below 5% and that the consequences of keeping money cheap will be very painful. The argument rests on a well-known lag: inflation takes six to eight months to hit people's pockets. Under that timeline, the geopolitical escalation of March would have started feeding into prices at the end of the year, with August as the first warning.
Public debt, the anchor that stops rate hikes
There is an uncomfortable explanation for the ECB's passivity: the enormous public debt of Western governments. Keeping rates low is the only way to avoid bankrupting states, but at the cost of fuelling inflation. The diagnosis is blunt: if consumption collapses and layoffs rise, the outlook points to stagflation. Capitalism runs on consumption, and runaway inflation strangles it from both sides.
The unadjusted income tax: the silent tax
Official inflation does not even tell the whole story. Since Spain's personal income tax (IRPF) was last adjusted for inflation, prices have accumulated a 30% rise in the official index, and the real figure would be even higher. Failing to update the tax for inflation turns every price increase into a disguised tax hike, a bill that never appears in the budgets but that everyone pays. The Christmas play, with its seasonal price rises, will complete the picture.
In other words: the slap arrives right on time. And the social safety net, as always, stays locked in the cupboard.
How long does it take for free money to come due? Inflation is approaching 4% in August, yet the social safety net does not cover the shopping basket. The policy of abnormally low interest rates, sustained by gigantic public debt, has left central banks with no room to react. And the six-to-eight-month lag in the transmission of price shocks suggests the worst is yet to come.
Rate hikes come late or not at all
The European Central Bank faces a dilemma: act or keep waiting. The harshest analyses argue that rates should never have fallen below 5% and that the consequences of keeping money cheap will be very painful. The argument rests on a well-known lag: inflation takes six to eight months to hit people's pockets. Under that timeline, the geopolitical escalation of March would have started feeding into prices at the end of the year, with August as the first warning.
Public debt, the anchor that stops rate hikes
There is an uncomfortable explanation for the ECB's passivity: the enormous public debt of Western governments. Keeping rates low is the only way to avoid bankrupting states, but at the cost of fuelling inflation. The diagnosis is blunt: if consumption collapses and layoffs rise, the outlook points to stagflation. Capitalism runs on consumption, and runaway inflation strangles it from both sides.
The unadjusted income tax: the silent tax
Official inflation does not even tell the whole story. Since Spain's personal income tax (IRPF) was last adjusted for inflation, prices have accumulated a 30% rise in the official index, and the real figure would be even higher. Failing to update the tax for inflation turns every price increase into a disguised tax hike, a bill that never appears in the budgets but that everyone pays. The Christmas play, with its seasonal price rises, will complete the picture.
In other words: the slap arrives right on time. And the social safety net, as always, stays locked in the cupboard.
Summary of a discussion on Burbuja.info - Foro de economía, actualidad y política., translated from Spanish and reviewed before publication. Read the full discussion (14 replies).
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