Taken from Dr. Thorsten Polleit’s BOOM & BUST REPORT, May 21, 2026, 55th edition. The podcast is: https://www.youtube.com/watch?v=JnhcLSfP4kc

Let us begin by clarifying what is meant by the term “inflation.” In everyday language, inflation refers to the rise in consumer goods prices over time. When inflation prevails, goods prices rise, everything literally becomes more expensive, you get fewer goods for your money, and anyone who holds money becomes poorer compared to a situation without inflation.

Where does inflation actually come from? Economists offer two explanations. First, there is the non-monetary explanation of inflation. According to this view, goods prices rise when demand exceeds supply (“demand-pull inflation”). One can think, for example, of an economic upswing in which demand for goods (labor, intermediate products, energy, etc.) rises sharply but meets a rigid supply, causing prices to increase.

Or there can be a cost shock that drives up supply prices (“cost-push inflation”). Examples include sharply rising energy prices (as is currently the case due to the Israel-U.S. conflict with Iran) or the collapse of production and supply chains (as occurred during the politically dictated lockdowns of 2020/2021).In addition to the non-monetary explanation, there is the monetary explanation of inflation. It states that goods price inflation is the result of an expansion of the money supply. Simply put: If the money supply rises (sharply), goods prices will also rise (sooner or later), creating goods price inflation. The American economist Milton Friedman (1912–2006) put it succinctly: “Inflation is always and everywhere a monetary phenomenon.”

Against the background of these two explanations, it makes sense to distinguish conceptually between goods price inflation and money supply inflation. And if one is an adherent of the monetary explanation of inflation (as the author of this article is), one can say the following: Goods price inflation is the result — the symptom — of money supply expansion. Money supply expansion is the cause of goods price inflation.

What are the consequences of inflation? This is a very important question, especially for investors, and one that is not so easy to answer. Let us begin with what is currently happening in all economies of the world: Central banks, in close cooperation with commercial banks, are expanding the money supply through credit creation. What follows from this? First of all, goods price inflation occurs — meaning goods prices are higher than they would be without the expansion of the money supply.

Goods price inflation reduces the purchasing power of money — and money holders suffer losses as a result. However, not all money holders, nor all people in the economy, are affected equally. This is illustrated by the so-called Cantillon Effect — named after the French banker and theorist Richard Cantillon (1680–1734).

According to Cantillon, the expansion of the money supply leads to a redistribution of income and wealth in the economy. The reason is this: Not everyone receives a share of the additional money created and distributed by the central and commercial banks. There are rather few first recipients of the new money. These are primarily the borrowers (especially governments). They can buy goods at prevailing prices with the newly received money.

Once this money has been spent on first-round purchases, it moves from hand to hand and raises effective demand, causing goods prices to increase. The consequence: Late recipients of the new money can only buy goods at higher prices. They become poorer compared to the first recipients of the new money. Anyone who receives some of the new money supply at an early stage thus becomes richer at the expense of the late recipients — and especially at the expense of those who receive none of the new money at all.

When the money supply is expanded, it is not always predictable which goods prices will be driven up first. Sometimes it is consumer goods prices; sometimes it is asset prices in the form of real estate, houses, or stocks. The latter has been observable in recent decades: The inflation of consumer goods prices trended downward in many countries from the early 1980s onward. At the same time, however, prices for houses and stocks rose sharply. In such a case, one can speak of asset price inflation.

Mainstream economists often speak of an increase in prosperity when, for example, stock prices rise. Unfortunately, this is a misinterpretation. It is true that those who own stocks become richer. At the same time, however, the purchasing power of those who hold money declines: They now have to pay more money to buy stocks. In essence, asset price inflation is “only” a redistribution: Stock holders gain, money holders lose. That said, the economy as a whole does not automatically benefit from rising stock markets and does not become richer. It becomes richer when people have more consumer and production goods at their disposal.

Inflation brings a number of other problems for money users. When inflation exists, goods prices must be adjusted more frequently. Think of restaurant menus, supermarket price tags, or price lists in hardware stores. This causes companies additional costs (“menu costs”). For consumers, inflation is also problematic because they are confronted with frequently changing prices. This makes price comparisons more difficult and complicates the determination of necessary consumption expenditures.

For employees and pensioners, inflation is usually a major problem. Nominal wages and entitlements are often adjusted to higher inflation only with a time lag and insufficiently. As a result, wage and pension recipients generally suffer real income losses in times of inflation.

Furthermore, there is the problem of bracket creep under inflation. This occurs because the state does not adjust (or does not sufficiently adjust) tax brackets to inflation. When companies and employees agree on a wage increase that merely offsets inflation, the real, inflation-adjusted wage remains unchanged. However, due to the nominal wage increase, employees slip into a higher (marginal) tax rate and pay a higher percentage of tax on their real unchanged income. Their real tax burden therefore rises due to the taxation of the now higher nominal incomes.

Inflation is also a serious problem for companies. They usually base their investment plans on the money prices of the goods required as a calculation basis. In times of inflation, not only do goods prices rise, but the prices of different goods also rise at different rates and at different times. This can make companies’ calculations more difficult and can even lead to miscalculations. The consequence: Companies start investments that subsequently do not pay off and become flops. Capital is consumed, and companies lose their economic strength.

Inflation is a problem for companies for yet another reason. Companies usually prepare their balance sheets on the basis of nominal values, or historical acquisition prices are used to determine accounting profits. Imagine the following situation: The company’s selling prices rise due to inflation. However, the accounting expenses for producing the goods enter the profit calculation at historical costs. The result is a “phantom profit”: The company’s profit is shown higher than it actually is in real terms. Because the company must now pay higher prices to replace the consumed goods. However, the nominal profit is subject to taxation. This increases the company’s effective tax burden. Firms literally lose substance, and this reduces their ability to make new investments and create new jobs.

You may want to ask: Why does inflation exist at all? In today’s unbacked paper money regime — a fiat money system — inflation is the order of the day. More precisely: The fiat money system is inflationary. Inflation is deliberately brought about. It is de facto an “inflation tax” that serves the state (and the special interest groups favored by it). That said, inflation is not a natural disaster, nor a supernatural visitation; it is man-made. And there are always situations in which it is particularly “worthwhile” for governments, special interest groups, and even the governed to advocate for (or demand) a (severe) inflation policy.

One need only think of financial and economic crises. In times of emergency, many people consider it advisable and even desirable to expand the money supply (even if this subsequently drives up goods prices) rather than accept a collapse of, say, the banking system and the economy. Especially because the pleasant effect of money supply expansion is immediately effective (“collapse averted”), while its costs (the reduction in the purchasing power of money, the redistribution effects, etc.) usually only appear at a later date.

This applies particularly in situations in which the state threatens to become insolvent. When the tax screw can no longer be tightened further, when at the same time creditors are no longer willing to grant new loans to the state and to renew its maturing debts, and when it is not politically possible or desired to cut spending, then those in power unashamedly resort to the policy of money supply expansion: The central bankers expand the money supply with which the outstanding bills are paid. The result is rising depreciation of the purchasing power of money — a process that, if not stopped, can even lead to hyperinflation.

Now we come to a very important aspect of inflation: Inflation “works” only when it comes unexpectedly. If all market participants knew exactly how inflation would turn out in the future, they would design or adjust their contracts (for rental apartments, car and home loans, delivery agreements, etc.) accordingly. They would base their contracts on the “correct” future inflation. If inflation then actually occurs as expected, there are no unintended redistribution effects.

For this reason, the state and its central bankers must rely on surprise inflation. Those in power and the central bankers strive to ensure that the general public does not recognize or keeps underestimating inflation. This is done, for example, by government statistical offices calculating inflation figures that are “doctored,” reporting inflation lower than it really is. Or the central bankers tell the public like a mantra that they are “fighting” inflation. (Which is, by the way, not true: Central banks cause inflation; they do not fight it!) This is intended to strengthen confidence in central bank policy and to nip any doubts about the value of the money issued by the central banks in the bud.

People should not even get the idea that the true, actual inflation is higher than the officially reported inflation. They should be made to believe in the target inflation promised by the central bank. In this way, “surprise inflation” is made possible on a permanent basis — to the benefit of the state and the special interest groups it favors. And the unrecognized inflation works like a bloodletting for all those who hold money or claims denominated in money.

And last but not least: Inflation erodes the morals and customs of people. In times of (high) inflation, individuals earn their income and profits not primarily through catering to the needs of their fellow human beings, but above all through cleverness, exploiting loopholes and evasion opportunities, and the ignorance of their fellow citizens. Everyone increasingly tries to improve their position at the expense of others. This creates a “win-lose” situation that actually poisons social coexistence, triggers bitter distributional struggles, and sometimes radicalizes people politically, ending in a “lose-lose” for society as a whole.

What does all this mean for the saver and the investor? We have already pointed out in previous issues of Dr. Polleit’s BOOM & BUST REPORT: The investor must achieve a positive real, i.e., inflation-adjusted, return after taxes on his capital. The formula for this is:

(1 + iₙ × (1 – t)) = (1 + iᵣ) × (1 + p),

where iₙ = nominal return before tax, t = capital gains tax rate, iᵣ = real interest rate, and p = inflation. The following table shows some calculations.

As the reader can see: It is not enough to “just” earn the inflation rate if you want to preserve your capital. You must instead achieve a return that covers inflation plus the tax burden on nominal gains.

To give an example: If you want a real return of 2 per cent and inflation runs at 4 per cent, you must achieve a nominal return before taxes (assuming a tax rate of 25 per cent) of 8.11 per cent (see table below). The example makes clear how important it is for the investor to know about the relationship between real return, inflation, and nominal return before and after taxes!

If you want to learn more, if you want to understand the big picture, then read Dr. Polleit’s BOOM & BUST REPORT. All information is available at boombustreport.com. Thank you very much for your attention!