Inflation Investing

As the subprime fallout, trader scandals and big bank breakdowns frazzle the economy, the American middle class is on the front line against inflation.

In "Return of Inflation" (National Review Online 3/25/08), Rich Lowry points out that seeing the Producer Price Index rise by more than 6 percent, the dollar at its weakest since 1971, and oil above $100 a barrel is more than a national embarrassment, it's dangerous to the lower- and middle-class who must bear the brunt.

"An analysis by The Washington Post found that prices for staples like groceries, gasoline and health care have risen 9.2 percent since 2006. According to its calculation, this price increase cost a middle-class family an extra $972 annually. Merrill Lynch says a greater proportion of consumers' disposable income went to paying for such staples -- 36 percent -- than at any time since the figure was first tracked in 1960."

In my mind, the real policy ramifications are how we are intending to avoid inflation.  If my household finances were in disarray, I would likely do the following: 1) reduce unnecessary expenses, 2) look for additional income, 3) refinance debts, 4) invest in new job skills.  The federal government should consider a similar strategy.  It has already refinanced debts through lowered interest rates and protecting the capital market.  It has sought addition income through international trade.  Unfortunately, Congress has been unable to reduce unneccesary expenses because of the crisis in the Middle East and a continued reliance on corporate subsidies.  Further, the government is neglecting to make investments in human capital that will provide the country the needed skills and infrastructure to be globally competitive. 

It is time for our nation to stop spending on conflict and credit and instead turn to energy and education.  It is a longer-term strategy, but it is a sure-fire investment in our collective futures.