While inflation is not specifically a tax, both taxes and inflation have the same net effect of reducing purchasing power. Consider, a worker’s gross pay is reduced by a variety of deductions, including income taxes, social security, and other accruals. What’s left is generally referred to as “take home pay”. Inflation erodes the purchasing power of the employee’s net pay and is, in effect, a second tax. To the extent that wage increases fail to keep up with inflation, the worker’s standard of living declines. The fact that the impact of inflation falls most heavily on those households at the bottom rung of the economic ladder, those with marginal income and limited assets, makes inflation brutally regressive.
Investors are in a much better position. By definition, they have assets, which, if appropriately invested, can provide a material offset to the impact of inflation on purchases. Portfolio strategies in an uncertain economy can require considerable assessment of the variables. It may be helpful to seek input from your advisor(s).
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA
