As inflation rises, people make adjustments. So OK, I won't go see that idiotic movie. And OK, I won't go out to eat. (Anyway, I prefer my wife's cooking... Really...Wait...No, I really mean it.)
In truth we can forgo many things when prices rise too high. Except for food. Yes, there may be a little bit of wiggle room, but not much, in eating macaroni instead of steak. Or eating fatty hamburger instead of filet mignon. But the truth is, people like to eat what they like to eat, and eventually, after a few cheapo meals, they will go back to the foods they love. Why is this important?
Because it means that even as inflation goes up, the one thing people will nevertheless keep on buying is food. At whatever the price becomes. And so when we think about who gets hurt the most by inflation, the answer is: those who spend the most on food, i. e., those who spend the largest fraction of their income on food. And who is that? The Chinese. The Indian Indians.
Just take a peek at the above chart, entitled "Food Componenet As A Percentage of Overall CPI". If you are Chinese or Indian or Polish, you spend 47.3%, or 31.4%, or 24.6% of your income, respectively, on...yes...just...FOOD. WOW. The average American, on the other hand, only spends 7.3% on food.
So for example if food prices double (as has happened once or twice in history) a Chinese person suddenly has zero disposable income at all, aside from food. While an American probably hardly even notices the doubling in price, being busy with his iPad, his iPhone, and eating iDog. Parenthetically, dogmeat historically has been a good hedge against food inflation, especially near the White House.
So you can be sure if there is a significant increase in inflation, then IN CHINA, there are sure to be riots in the streets, pitchforks, axes, the whole nine yards. Because the Chinese people, as all peoples (except N. Koreans), tend to insist on not starving. If there is significant inflation in China, then the leadership knows that they must act and act quickly, or they will be dragged unceremoniously from their opulent villas, dragged by their pantalones and drowned in the rice paddies. And that is why the Chinese leadership clique pays exceedingly careful attention to inflateion, and always acts quickly to contain it, and to foster economic growth.
By contrast, in the US, inflation is really not feared very much. Deflation is feared more. So Ben Bernanke has QE1 and QE2 and soon QE3, all of which boost global inflation. He nevertheless smiles and smiles while remaining a villain. There will be no riots in the streets, or even occupyings, when inflation hits the US. Why? Because Americans are the most inflation tolerant economy in the world.
This is the secret weapon the US has over China. There is no fear that the Chinese will call in the debt of US Treasuries which they hold, to the tune of more than a trillion dollars. They know that the US can, whenever it wants, goose up inflation, and ruin them. So it is a Mexican standoff bethwee the US and China, and we can blithely continue to run up the debt for some time to come. US Treasuries will never go hungry for buyers.
The dire warnings we hear about the coming catastrophe of debt are all true. But they are far off. We still have years and years in which to wallow in more and more debt, secured by our 7.3% share of income which we are spending on food. This protects us.
And what is the impact of this on the Obama - Romney race? Its all in the near term optics. How scary things look ahead of the election. That is the challenge for Republicans. Talk up the horror show and catastrophe of the debt, all of which is true, but none of which is about to happen anytime soon.
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