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Monday, February 22, 2010

Indexing Capital Gains for Inflation

The latest information from the Bureau of Labor Statistics put consumer price index inflation at 0.2 percent in January. Over the past year (January to January), CPI inflation ran at 2.6 percent.

Meanwhile, the Federal Reserve just announced an inching up in the discount rate (from 0.5 percent to 0.75 percent). Is this a sign that the Fed is ready to start some tightening after its unprecedented loose monetary policy? Well, not according to the Fed. The Fed effectively is saying that it is keeping its foot on the money growth accelerator for the foreseeable future. Any true tightening would require a dramatic reining in of the monetary base - and no one is talking about that.

So, given the dramatic increase in the monetary base, the risk of an inflation flare up persists. In addition, it must be noted that CPI inflation already has started the process of creeping higher. For example, nonexistent inflation over the period of December 2007 to December 2008, shifted to 2.7 percent CPI inflation from December 2008 to December 2009.

From an entrepreneur's perspective looking to fund the start up or expansion of a business, it also must be kept in mind that inflation and inflation expectations not only affect interest rates, but also impact the real capital gains tax rate...

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

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