Inflation, interest rates and cost of capital
I begin by stating that the subject I am addressing is complicated and, therefore, difficult to understand. But persistent global inflation, combined with threats of cures to that inflation leading to an unanticipated recession, compel me to treat this subject with a pinch of salt.
On the one hand, it seems clear that inflation palliatives are not going to be able to keep inflation at bay. First world central banks are beginning to consider more drastic measures to the insidious rise in prices. But, like a group of doctors faced with a difficult case, they are also evaluating whether the treatment will be harsher than the disease. That a harsh remedy, which saves us, may also cause us a long and painful recovery. Others, we think that the treatment, moderate or hard, is not the prescription.
One way or another, inflation and its aftermath are not a "cocoon flare". Rather, as we said before, it is like an oil spill, moving in the ocean and that isolating it, extracting it and cleaning it up will require patience and care. Ah, and that no one approaches it with a lighted match, like a general strike or a strike of unpaid workers.
Going back to basics, inflation is best defined as a tax on money. This levy, which slashes some of the purchasing power of the currency, is reflected in price increases and thus a reduction in the things you can buy to secure your day-to-day life. Thus, one of the first victims of inflation are salaries and pensions. Wage earners and pensioners live on a certain amount of money, which now pays the new tax of severe inflation. And it is not that there was no inflation before, there was. But it was low, and for wage earners and some pensioners, it was possible to achieve an improvement in their paychecks.
Now, cost of living increases require structural adjustments that are not always possible to make in the short term. In the specific case of salaries, salary adjustments for inflation end up, as corroborated by experience, being transferred to prices and thus, a harmful and useless spiral. Pensioners have very little possibility of changing their pension amounts and end up reducing their quality of life.
