Inflation II

After “printing money”, the rise in prices isn’t as direct as many economists predict. It depends on the mechanism utilized and the utility attributed to it.

Since the fall of Lehman Brothers, and now because of the Covid, a spectacular increase of the popularly phrased “money printing” has been used. In reality, there aren’t more bills circulating, but it is rather the Federal Reserve (FED) and other central banks expanding their balance with the objective of deleveraging financial entities. The idea is that since that money doesn’t affect the balance of commercial banks, it hinders a rise in prices. This mechanism was reproduced year after year in the golden age of leverage. The recommendations of the Basel Accords seem to want to level the risk of the sector. These agreements were motivated by the Financial Stability Board (FSB) and the G20 upon observing how the 2008 crisis could have, among other causes, its origin in the excessive growth of the banks’ balance sheets and the leverage of the by-products.

Returning to the topic of measuring inflation, faced with the fragility of the official data and the necessity of having accurate figures, there are private entities that try to independently calculate the data of price increases. Some are very wellknown and respected such as Shadow Government Statistics (www.shadowstats.com). This company, created in 2004 by the prestigious economist John Williams, follows a non-manipulated American CPI. As we could have guessed, this one is different from the one presented by the authorities. Another good initiative, in what would be considered the Wild West of Argentina, comes from a group of economists that in 2007 wanted to start to provide alternative price indexes, www.inflacionverdadera.com. From that point on, their work evolved together with the Massachusetts Institute of Technology (MIT), creating The Billion Prices Project and, later on, PriceStats, www.pricestats.com.

The doubt that can arise regards whether you need to estimate the value of inflation to prepare for retirement. The terrible answer is: yes, but it’s very difficult to calculate. If you aren’t aware of the evolution of inflation, you could estimate the necessary money for future expenses and “bring them to the present” in a precise and reasonable way. The explanation of the expressions “bring to the future” or “bring to the present” are related to the equivalent financial concept.


With 500 euros today, Peter can buy a certain basket of goods at his supermarket. Supposing a homogeneous inflation of 3%, while omitting the possibility of depositing money in an interestbearing account, Peter would need 515 euros to be able to buy that same basket in a year. In this context, you can say that 500 euros today is financially equivalent to 515 euros in one year.

A similar reasoning can be made by adding the possibility of investing the original amount of money in risk-free assets. Another way to demonstrate the great interest that the inflation estimate has in the field of retirement is to know the deterioration of the initial assets over time (again, independent from the profitability obtainable from them).

It’s necessary to emphasize that inflation utilizes compound interest, and the increase in a year is “mounted” on the following year and so on. This process provokes a strong multiplier effect on the initial values. We should remember the famous quote by Albert Einstein: “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it.” Thus, this implies that a minimum deviation in the estimate of inflation can signify an abysmal difference in results over the years.

It will continue