Inflation: The Tax Nobody Votes For

There is a tax that requires no legislation, no vote, no public debate. It is never itemized on a pay stub. It does not appear on a ballot. It is collected silently, continuously, from every person who holds dollars, and it falls hardest on those who can least afford it. We call it inflation, and we have been taught to regard it as normal — a 2% background hum, the unremarkable cost of a functioning economy. It is none of those things. It is a policy choice with winners and losers, and the losers rarely understand what is being taken from them.

Three Things Called Inflation

The first problem with any honest conversation about inflation is that the word refers to at least three different phenomena, and public discourse treats them as one.

Monetary inflation is the expansion of the money supply. This is the original meaning of the term, and the one Austrian economists insist on. When a central bank creates new dollars — whether by purchasing government bonds, by lending to banks at below-market rates, or through the various facilities invented during recent crises — the money supply grows. Between January 2020 and January 2022, the M2 money supply in the United States increased by roughly 40%. That is monetary inflation; the rest is consequence.

Price inflation is what most people mean when they say “inflation.” It is the increase in the general price level as measured by indices like the Consumer Price Index. When your grocery bill rises, when rent climbs, when the mechanic charges more for the same repair — that is price inflation as you experience it. It is the symptom, not the disease. Prices can rise for many reasons — supply disruptions, increased demand, regulatory costs — but when prices rise broadly, across categories, and persistently, the common denominator is almost always monetary.

Asset inflation is the least discussed and most consequential for inequality. When new money enters the economy, it does not arrive evenly. It flows first through financial institutions, into bond markets, equity markets, and real estate. Asset prices rise before consumer prices do. Those who own assets — stocks, property, businesses — see their wealth increase. Those who do not own assets see only the eventual rise in the cost of living. This is not a conspiracy theory. It is a mechanical description of how money creation works, and it explains a great deal about the divergence between asset prices and wages over the past two decades.

Why the CPI Understates What You Feel

The Consumer Price Index is the government’s official measure of price inflation, and it is the number cited when policymakers assure you that inflation is “under control.” The problem is that the CPI has been revised repeatedly in ways that systematically lower the reported number.

The Bureau of Labor Statistics has introduced several adjustments over the decades. Hedonic adjustment accounts for quality improvements — if your new laptop is faster than last year’s model, the BLS may record its price as having fallen, even if you paid the same or more. Substitution weighting assumes that when beef gets expensive, you switch to chicken, and adjusts the basket accordingly. Geometric weighting replaced arithmetic weighting in 1999, which mechanically produces a lower number. Owners’ equivalent rent — a modeled estimate of what homeowners would pay to rent their own homes — replaced actual home prices in the index in 1983, effectively removing the largest purchase most families will ever make from the inflation gauge.

Each of these adjustments has a technical justification. Taken together, they produce an index that consistently understates the inflation experienced by a family trying to maintain a fixed standard of living. If you feel like your money does not go as far as the CPI suggests it should, you are not imagining things. You are measuring a different quantity than the Bureau of Labor Statistics is.

The divergence is not small. Alternate measures that use pre-1990 methodology — such as those calculated by economist John Williams at ShadowStats — consistently show inflation running 3 to 5 percentage points above the official CPI. Whether those alternate measures are precisely right is debatable; that the official number understates lived experience is not.

The 2% Target: An Arbitrary Origin

Central banks around the world now target 2% annual inflation as though it were a natural law. It is not. The 2% target originated in New Zealand in 1989, when the Reserve Bank of New Zealand Act established an explicit inflation target as part of a broader reform package. The number was partly analytical and partly pragmatic — low enough to sound responsible, high enough to give the central bank room to cut rates during downturns. Other central banks adopted it over the following decade, not because rigorous research established 2% as optimal, but because it became a coordination point. It is a convention, not a discovery.

The compounding effect of even 2% annual inflation is severe over a lifetime. One hundred dollars in 1971 — the year Nixon severed the dollar’s last link to gold — has the purchasing power of roughly twelve to fifteen dollars today, depending on which measure you use. That is not 2% inflation. It is the cumulative result of decades during which actual inflation frequently exceeded the target and the target itself was only formally adopted partway through.

Consider this concretely. If you earned $50,000 in 1990 and your salary kept pace with official CPI, you would earn roughly $115,000 today. But if your costs — housing, education, healthcare — rose faster than the CPI captured, you are poorer in real terms despite your nominal raise. This is the compounding erosion: invisible in any single year, devastating across a working life.

Who Wins, Who Loses

Inflation is not a natural disaster that strikes everyone equally. It is a transfer mechanism, and the transfers flow in predictable directions.

The winners are debtors, particularly those who borrow at fixed rates. If you took out a thirty-year mortgage at 3% and inflation runs at 5%, you are repaying your loan in cheaper dollars every year. The real burden of your debt shrinks. The largest debtor in the United States is the federal government. Inflation reduces the real value of the national debt without requiring any politically painful decision to default or restructure. This is not incidental. It is a feature.

The winners also include asset holders — those who own stocks, real estate, and businesses. As we noted, new money flows through financial markets first. Asset prices respond to monetary expansion more quickly than wages do. The result is a wealth effect for owners and an affordability crisis for everyone else. The gap between the S&P 500’s trajectory and median real wage growth since 1971 tells the story plainly.

The losers are savers. Anyone holding cash or cash equivalents — a savings account, a money market fund, a pension with fixed nominal payouts — is losing purchasing power every year. The interest rate on a standard savings account has been below the rate of inflation for most of the past two decades. Saving in dollars is, mechanically, a losing strategy. This is not a failure of discipline. It is a feature of the monetary system.

The losers also include wage earners, particularly those without bargaining power. Wages are sticky; they adjust slowly and incompletely to inflation. If prices rise 6% and your raise is 3%, you have taken a pay cut. You will not see it on your pay stub. No one will announce it. But you will feel it at the grocery store, at the gas pump, and when the rent comes due.

Fixed-income retirees bear the sharpest edge. Social Security adjustments are tied to the CPI, which, as we have discussed, understates lived inflation. A retiree whose expenses are concentrated in healthcare, housing, and food — categories that have outpaced the CPI for years — loses ground every single year, even with cost-of-living adjustments.

The Political Convenience of Invisible Taxation

The reason inflation persists as policy is that it is politically convenient. A government that wants to spend beyond its tax revenue has three options: borrow, tax, or inflate. Borrowing requires finding willing lenders and servicing the debt. Taxation requires legislation, which requires votes, which requires explaining to constituents why their money is being taken. Inflation requires neither. The central bank expands the money supply; the government spends the new money; the cost is distributed across everyone who holds the currency. No vote is held. No law is passed. The mechanism is invisible to most of the people paying for it.

This is what Mises meant when he described inflation as the most important fiscal expedient of the state. It is taxation without representation in the most literal sense. The founders of the American republic were explicit about the dangers of debased currency — the Continental Congress’s experiment with paper money during the Revolutionary War produced the phrase “not worth a Continental” — but the institutional memory has faded.

The political incentives are clear. No elected official benefits from announcing a new tax. Every elected official benefits from spending that appears costless. Inflation is the mechanism that makes that illusion possible, and it is sustained by the widespread belief that 2% annual inflation is normal, natural, and benign.

The Proportional Response

Here is where we must be honest about the limits of alarm. The Austrian critique of inflation is correct in its fundamentals. Inflation is a tax. It is regressive. It transfers wealth from savers to debtors, from workers to asset holders, from the politically unconnected to the politically connected. These are not controversial claims; they are mechanical descriptions of how the system operates.

But the prediction that follows — that fiat currency is doomed, that hyperinflation is imminent, that the dollar will collapse — has been wrong for fifteen years running. People who moved entirely into gold or Bitcoin in 2011 on the thesis of imminent dollar collapse have, in some cases, done well. But the thesis was wrong on its own terms. The dollar did not collapse. The system proved more resilient, more adaptable, and more capable of absorbing monetary expansion than the most alarmed voices predicted.

This does not mean the critics are wrong about the direction. It means they have been wrong about the timeline and the magnitude. Real inflation has eroded purchasing power. Asset prices have diverged from wages. The system is producing the inequities the Austrians predicted, just more slowly and less dramatically than the apocalyptic framing suggested.

The proportional response has three layers. Layer 1: Understand the mechanism. Know that holding cash is a losing position over time. This is not investment advice; it is arithmetic. Layer 2: Diversify your holdings across asset classes that have historically maintained purchasing power — property, equities, commodities. This is infrastructure, not speculation. Layer 3: Support monetary transparency and accountability wherever you encounter it. The problem is not that we have a monetary system; it is that the system operates with minimal public scrutiny and maximal political convenience.

You do not need to predict hyperinflation to act sensibly. You need to understand that 2% annual erosion is not nothing, that the official numbers understate the real cost, and that the system is designed to make this invisible. Once you see it, you cannot unsee it. And once you cannot unsee it, you will make different decisions — not out of panic, but out of clarity.

This article is part of the Sound Money Principles series at SovereignCML.