Good Inflation vs. Bad Inflation

by Paul Dietrich, CEO Fairfax Global Markets, September 10. 2018

Why This Matters?

Investors need to be able to distinguish between good inflation and bad inflation.  In short, bad inflation is when government spends more than it takes in in tax revenue.  Bad inflation is when we spend trillions of dollars in foreign wars and much of that money ends up in the Swiss bank accounts of Iraqi and Afghan warlords.  Good inflation comes from rising wages that filter through the economy and create more economic growth and are paid for by the private sector and not by government deficits.

Good Inflation:  When economists see inflation that is the direct result of low unemployment and wage growth, that is “good inflation.”  When we see global economic activity expand and commodity prices are going up, and US manufacturing is expanding and has more pricing power, that results in “good inflation.”

Good inflation creates a virtuous circle of economic expansion.  When wages go up, and corporate profits go up because of economic expansion, everyone benefits, in that these higher wages and higher profits flow through US local communities and create even more economic expansion.

Yes, there may be higher inflation, but it is matched by increased GDP growth!

Bad Inflation:  When the US creates budget deficits because of entitlement spending or overall government operations or foreign wars or foreign nation-building in the Middle East, this is “bad inflation” in that it does nothing to increase and expand the US economy or the nation’s GDP.

Americans should want more “good inflation,” and a lot less “bad inflation.”  There is an important distinction between the two and economists need to point this out over and over.