Inflation Might Be Even Worse Than We All Think

Beyond the Headlines: Personal finance news and research you may have missed

Beyond the Headlines

These days it seems like everything is going in the wrong direction. 

Gas prices are breaking records daily (we’re into $5 territory now), grocery bills are crazy, and interest rates are rising for the first time in years. Higher mortgage rates have house hunters deciding those skyrocketing home prices are just not feasible with the added borrowing costs—and rents are no better. Even increases in the average wage, which had been a saving grace in the high-inflation economy, may be slowing down (although some economists say that could actually be a good sign for inflation in the longer run). 

Then there’s the beating the stock market has taken, the fact that households are socking away less and less in savings, and the prospect that an increasingly fragile economy may slip into recession, perhaps sooner rather than later.

But that’s the stuff you likely know about, whether you’re reading about or just living it. Here’s what you may not have heard: Did you know that as bad as inflation is, it might actually be worse than it appears? Or that there’s a proposed student loan reform supported by both critics and proponents of mass debt cancellation?

To reach beyond the biggest headlines, we scoured the latest research, surveys, studies, and commentary to bring you the most interesting and relevant personal finance news you may have missed.

What We Found

Inflation Might Be Even Worse Than We All Think

Sure, today’s annual inflation rate—running at 8.6%, its highest in more than 40 years—is bad. But at least it’s not as bad as it was in the old “stagflation” days of the disco era, when it went as high as  14.8% in 1980. 

Or is it? 

We’re actually a good deal closer to inflation’s early-1980s peak than some might think, argues Lawrence Summers, a Harvard University economist and former Treasury secretary under Bill Clinton, in a new paper he co-authored. The reason, Summers says, is that the way the Bureau of Labor Statistics calculates inflation has changed over time. If you take today’s methods and apply them to the old data, the inflation of the 1970s and ‘80s actually peaked at 11.4%, less than 3 percentage points higher than we are now. 

“The current inflation regime is closer to that of the late 1970s than it may at first appear,” wrote Summers and his co-authors, including an economist at the International Monetary Fund.

If true, the finding has some unsettling implications for the economy. The 1970s-era inflation was famously brought under control only after the Federal Reserve under Paul Volcker dramatically raised the Fed’s benchmark interest rate so high that the economy went into a recession. Today’s Fed is seeking to accomplish the same feat while bringing the economy in for a recession-free “soft or soft-ish landing.” But if Summers’ analysis is correct, its task will be very nearly as big as the one Volcker faced. 

At Least This They Can Agree On

Should every borrower with federal student loans get some debt wiped away—forgiven as if it were paid off? It’s a controversial topic, to say the least, and the debate has taken center stage since the government froze all payment obligations on the loans at the start of the pandemic.

On the one hand, borrowers say they deserve relief from debts they’ve been unfairly forced to take on because public funding for public education has dwindled. On the other, critics say forgiveness benefits wealthy and highly educated borrowers at the expense of taxpayers and people who never went to college.

Interestingly, people on both sides agree on one potential reform: They want to make it easier for student loan borrowers to write off these loans in bankruptcy.

Unlike with most other kinds of debt, student loan borrowers who file bankruptcy can only write off those debts if they prove to a court that the debts impose “undue hardship”—a requirement that legal experts say is hard to meet. Only one in 1,000 people with student loans who declared bankruptcy even tried to have their student loans discharged in the proceedings (though nearly 40% of those who tried succeeded), according to a 2011 study. 

In August, a bipartisan group of senators proposed a bill that would allow student loans to be discharged through bankruptcy after a waiting period of 10 years. It would give borrowers with no realistic path to repay their loans a last resort to reboot their finances and get back on their feet. 

“At first glance, that seems a much more reasonable approach rather than blanket cancellation,” said Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget. 

“Bankruptcy rights must be restored to all student loans as they exist for all other loans,” said Alan Collinge, an activist for student loan forgiveness who leads the grassroots Student Loan Justice organization. 

President Joe Biden recently signaled he is considering forgiving a portion of every borrower’s debt (he has supported $10,000 in the past), though a decision won’t likely be made until later this summer, The Wall Street Journal reported. 

The Pitfalls of a Future Where Your Face Is Your Credit Card

At five supermarkets in Sao Paolo, Brazil, customers can check out just by smiling into the camera or waving their hand. It’s part of a pilot of Mastercard’s new biometric payment system that identifies customers by their face, and the plan is to take it worldwide eventually.

Sounds pretty cool, eh? Rita Matulionyte, a law professor at Macquarie University in Australia and an expert in tech and intellectual property law, has raised a host of concerns. 

For one, will customers trust Mastercard and its partner companies to securely store their biometric data and keep it private? And what about accuracy? While the algorithms that power facial recognition technology have proved more than 99% accurate in some tests, Matulionyte noted that the technology has run into problems when taken out of the lab and into the real world. 

For example, facial recognition tech has performed poorly trying to identify people based on photos taken in less-than-perfect conditions, such as in badly lit areas or when the subject is tilting their head down. Even the normal aging process has increased the error rate in government tests.

Bias could also come into play. A 2019 study by a U.S. government research agency found that most facial recognition algorithms the agency reviewed were better at identifying people from certain races than others. 

A spokesperson for Mastercard did not respond to a request for comment. 

Mastercard cited a 2021 survey by Dentsu Data Lab showing 74% of global consumers have a positive attitude towards biometric tech, while Matulionyte pointed to a 2020 study by GetApp showing that 69% weren’t comfortable with its use in retail settings.

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.

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