Among economists, there has been an unofficial definition of the term inflation for many years. Beyond referring to the increase in the price level, he dictates: “Inflation is a hidden tax.”
Because? Very easy. Let’s see an example. You had saved 1,000 euros in a drawer. He is worried because he knows that governments are thirsty. From time to time he opens the drawer and checks that his 1,000 euros are still intact in their place. Through the Central Bank, money in circulation is increased. That drives up prices, say, 10%. The purchasing power of those bills will be less than the day you put them in the drawer. His purchasing power is 900 euros. In other words, they have charged you a 10% tax without knowing it and thinking that taxes have not increased.
Is it our case? Not quite. The current increase in prices is mainly due to cost increases, energy, transport, raw materials. That is the first cause. The second component, and we cannot measure how much it weighs on inflation, is the increase in money in circulation above the increases in GDP. During the covid, the priority, and it was correct, was to preserve employment, the business fabric and liquidity while we healed and immunized ourselves. It was done with an injection of money supply equivalent to the previous real estate bubble. What was important was achieved: keeping economic structures unscathed and avoiding a collapse of economic and financial flows with a world locked in their homes by the virus.
In Europe, less weight is given to the second component to explain inflation, while in the United States it is given more weight. But the final effect on the citizen is the same. Their income and savings have lost purchasing power. It is as if they had been taxed.
On the other hand, inflation, not deflated by the majority of central governments in the tax brackets of the different taxes (except for some autonomous communities) has produced that an income that buys fewer things has, in addition, to pay a higher tax rate . As a result of all this, as is the case in Spain: tax collection has reached all-time highs.
In this context, the increase in taxes, banking, energy, large fortunes, solidarity taxes, wealth supplements, etc., only undermine the savings of economic agents that, although they belong to income and middle social classes, are the base of a country’s investment. The erosion of the middle classes is the greatest risk to the political stability and democratic health of a society.
