If you live on the same planet as CNBC, it’s likely you’ve heard concerns about inflation – and it makes sense, given the amount of money we’ve been pumping into the economy as a result of a little thing called COVID-19.

But how legitimate is the concern, and – more importantly – does “worrying” about it translate to any productive behavior changes we should be making? After all, worrying about it but then doing nothing isn’t exactly helpful.

Today, I’m diving into two major questions:

1. What are economists saying about inflation right now? Is it legitimate?

2. If it is legitimate, is there anything that we can do about it?

Why do we care about inflation?

Well, for one thing, this debate feels like big fuel for the cryptocurrency fire right now.

The general argument is that inflation is inevitable because of government spending in response to Coronavirus, so the U.S. dollar will become weaker and less valuable in the future.

People who love Bitcoin say that it's the answer: "Don't buy gold, and don't invest more money in stocks and bonds. Buy cryptocurrency – it's the money of the future."

Which sounds very Orwellian to me; like, "Buy the robot money because your human money won't be worth shit!"

So a big reason why I personally care to learn more about inflation right now is because there are some camps of people who say the current system is f***ed and we all need to jump into the nearest ship and sail it directly into a Coinbase account to save ourselves.

The other, less drastic take on hedging against inflation isn't to invest in an entirely new asset class, but to be more serious about leveraging the ones you already have: It's cash that's purportedly going to lose value more quickly, so hanging onto a lot of cash isn't a great idea, say some economists. Investing in the stock market is, while still USD, a way to grow your money more quickly (theoretically, of course – there are reasons to believe that the market itself is overvalued right now, too).

Today, we're going to explore a few different perspectives.

The psychology around inflation

An interesting thing about inflation as an economic phenomenon is that there's a big, fat, human psychological component to it.

In some ways, it makes me nervous that everyone is so nervous about inflation, because it can be a bit of a self-fulfilling prophecy.

The thinking goes like this: If I'm worried that a few years from now my goods are going to cost way more than they do today, my behavior will change in response to that fear. I'll start buying more today – spending a lot of money today – because I'm afraid that same money will buy less later.

At scale, everyone spending more and buying more and hoarding more leads to shortages (high demand, low supply) which, in turn, drives prices up. And bada bing, bada boom – there you have it. Fear of inflation creates an environment perfect for creating inflationary circumstances.

For a hilarious and recent example, look no further than the great toilet paper shortage of 2020. For reasons still unknown, the Coronavirus outbreak caused people to fear that they were going to suffer from bouts of explosive, chronic diarrhea, and there wouldn’t be enough toilet paper left over to save our butts from peril.

Fear that there would be a shortage led to an actual shortage, because fear caused behavior to change. The prices went up – you couldn’t get pillowy Charmin Ultra Strong for $15 a pack anymore. Nope, you were doomed to paying $30 for a tissue paper-thin, ass-chapping disgrace of a product on Amazon.

How economists thought about inflation historically

An economist from New Zealand discovered in 1958 that there was a correlation between low unemployment and high wages and inflationary conditions, in a discovery that's now known as the "Phillips Curve," which paints a pretty grim picture for what keeps inflation at bay (the opposite scenario helps prevent inflation: high unemployment and low wage growth).

The oversimplified explanation is this: Do you want everyone to have a job that pays well? Because if so, things are going to cost more. If you want things to cost less, then great – but not everyone gets to have a job and wage growth will be slower.

In other words, the theory was that more people having jobs meant the price of goods rises.

So this was more or less generally accepted as an economic truth, until the Great Recession. After the Great Recession, unemployment started to drop. And then drop some more.

And predictions ran rampant that inflation was coming as a result.

...but it didn't.

Why not?

Well, for one thing, the Federal Reserve did a pretty good job of keeping prices low.

But – and this is the kicker – that interference from the Feds can actually cause inflation.

The concern about government spending

Some economists are concerned that central bank spending (keeping prices artificially low, funding government programs, etc.) is heating up the economy in a way that's going to spin out of control, though other economists believe that the risk of this actually happening is low because the economy isn't "running too hot" right now. (Now, whether or not that’s because the economy hasn’t fully reopened remains to be seen.)

1 in 20 jobs was lost because of the pandemic, and money is moving through the system pretty slowly right now. Given the state of the world, it's not surprising that money is moving slowly – but the world is opening back up, and it's likely people will start living (and spending) a little more aggressively soon. #RichGirlSummer, meet #VaxxedGirlSummer.

According to the Peter G. Peterson Foundation (yep, I didn't make that name up), only about the 30% of COVID-19 checks (stimulus) were spent. The other 70% was invested in things like cryptocurrency, the stock market, real estate, or paying back debt.

To me, that seems like an odd shift.

And remember that disappointing April Jobs Report? Where unemployment was higher than expected and fewer jobs were created than predicted? The Phillips Curve would say that that's actually a good thing for inflation – that "higher" unemployment (relatively speaking) helps keep prices lower.

Other explanations that some economists are giving

Remember how the whole economy came to a screeching halt about a year ago?

It messed with supply chains and threw a wrench in the way things were humming along.

They believe that – for some goods with prices rising quickly right now – there's more demand than the "supply" had prepared for, given the shutdown, thereby driving prices up. The theory is that, within about a year, prices will stabilize and normalize again.

Put simply: They believe we're not seeing the beginning of runaway inflation, we're just seeing some residual ripple effects of an economy that ground to a halt and is now attempting to start back up.

It reminds me of what happens to airplanes after a system of storms moves through the country: Planes get "stranded" overnight in cities they're not supposed to be in because of cancelations, and when the system starts back up in the morning after the storms pass, things take about a day or two to normalize. The system has to be reworked to account for the aircraft that are in the wrong cities, like a big, hairy game of Tetris.

Of course, the economists in the, "It's coming" camp are saying that these wonky shortages are just inflation in disguise, so if you’re confused and don’t know what's going on, you’re in good company – economists disagree, too.

So why aren't more prices going up across the board?

Well, some say it's a bit of a game of chicken: Businesses aren't sure if the demand is real, or if it's the result of a shortage. We're in such a strange economic period that businesses aren't sure if consumers will pay higher prices.

After all, demand for consumer goods may have gone up over the last year because people couldn't spend on things like travel, concerts, and other "experience"-type events and purchases, so it’s unclear whether that demand is artificially high (or low).

There's another theory – "decency pressure" – that businesses are hesitant to raise prices during a pandemic because, well, it'll make them look like assholes. It'd be like raising the prices on bottled water during a natural disaster.

All that to say, my conclusion is this:

We may need to wait for the dust to settle before we can know for sure

There are almost too many unique circumstances at play here with lots of seemingly unconnected ripple effects to know what's going to happen, hence why economists are disagreeing all over the place about what's happening now and what's going to happen later.

Will I be rushing out to buy Bitcoin as a hedge against the evidently inevitable inflation? No, I don't think so – because as we discussed in the "Making Sense of Cryptocurrency" post, it kinda seems like that's everybody else's play, too – with 83% of Bitcoin's high in April having been accrued in the 6 months prior, I'm a little wary of jumping on that train of thought.

Maybe I'll live to regret that decision, but for now, I'm getting "panic bubble" vibes, and it's distorting the value of the technology for me a little.

In other words, it's hard to say if all the money is pouring into cryptocurrency because people actually believe in the validity of what it can offer the future, or if people are just scared.

(Edit: When this was written in early May, Bitcoin’s price was $57,000; as I edit this for scheduling, it’s $38,000.)

I will, however, continue to stay the course with my current plan: Investing in diversified, low-cost index funds for the long haul – because I already believed that cash was a melting ice cube. Whether it's going to melt more quickly now, I don't know – but the most likely shot I have at escaping peril (that I can see right now) is continuing to invest in assets that are gaining inherent value (i.e., stocks).

(Whether or not stocks themselves are overvalued right now is another hot topic; the measures and "ratios" that we use to analyze those questions would suggest that they are, but that’s a topic for another day.)