According to the government’s own statistics, price inflation is running above 8% annually.  Meanwhile, most Americans aren’t getting a salary increase of anywhere near that much unless they are changing jobs or getting promoted.

Jerome Powell and the Federal Reserve wanted to see higher price inflation a few years ago.  When it went well above their two-percent target, they assured us that it was only “transitory”.  Now that it isn’t transitory, they assure us that they will fight inflation and bring it back down.

Of course, in trying to bring it back down, they will likely cause a recession, and they may pop the mother of all bubbles.  It can also be called the Everything Bubble because almost every asset category seems to be in a bubble.  Gold and silver may be the exception.

Let’s say that the Fed is able to bring the inflation rate back down, regardless of the impacts on the economy and the financial markets.  When the Fed and the financial media talk about bringing inflation down, they mean bringing down the rate of inflation.  And they likely don’t even mean bringing the rate down to zero.  They just want to get it back to 2%, or somewhere around there.

And to be sure, we would be much better off if we quickly return to a state of 2% annual price inflation.  But let’s be clear that this is just bringing the rate down.  It isn’t bringing the price level down.

If a particular consumer product cost $100 last year and now it costs $108 this year, that is an increase of 8% for that product.  When the Fed talks about bringing down price inflation, they aren’t saying that this particular product is going back to $100 as previously seen.  In fact, they aren’t even saying that it will stay at $108 next year.

Instead, we may get a 2% price inflation rate (if they are successful in bringing down the price inflation rate).  So the product you are now paying $108 for will cost somewhere between $110 and $111 next year.  This is what they mean when they refer to bringing down inflation.

Think about this in context of things you routinely buy.  Maybe that $108 today represents your weekly grocery bill.  If you have a family, it is probably quite a bit more than that.

You aren’t going back to your $100 per week grocery bill unless you cut something out.  You are now at the $108 level, and it is constantly going higher.  It is just a question of how much higher and how fast.

Do you think your job will give you a raise of 8% next year to make up for the inflation of last year?  In most cases, that won’t happen.  And even if it does, you are still behind.

There is almost never price deflation.  The Fed won’t really allow it to happen.  It hasn’t happened since the Great Depression.  There may have been one year in the 1950s where there was a very tiny decline in overall prices.  The norm is for prices to go higher.

Remember this when people say that inflation is declining, or that they are bringing down inflation.  The overall price level isn’t declining.  The rate of increase may be declining.

This is a generalization.  If the Everything Bubble pops (and there are signs that it may be starting, especially with stocks), then there will be asset price deflation.  Stocks and housing prices are likely to go down.  Some commodities may go down in price as well.

It is unlikely that the overall price level for consumer products will go down.  If it does, it will be very temporary, as the Fed will resort to more monetary inflation.

As Ben Bernanke once said, the Fed can always raise the price level, even just by credibly threatening to increase U.S. dollars in circulation.  He was very right on this point.  Unfortunately, the Fed has really seemed determined to create higher price inflation, especially over the last couple of years.

They got what they wished for, but they may be regretting it now.  For the first time in a while, the Fed is in a really tough position of choosing between saving the dollar and propping up the economy.

They will try to maintain a balance, but I think they will always choose to save the dollar.  They don’t want hyperinflation.  The giant bubble (the misallocation of resources) will eventually pop.