The Rise of Inflation and How Bitcoin Can Help

• The world has been experiencing higher than average inflation for several years because of the COVID-19 pandemic.

• Inflation worsens economic inequality because it disproportionately impacts middle and low-income communities.

• Due to its deflationary nature, Bitcoin presents a promising solution to mitigating the negative effects of inflation and lessening economic inequality. 

Inflation in Canada, USA, and Mexico is higher than it’s been in a generation. Essentials like food, clothing, transportation, and housing are becoming more expensive at a faster rate than people expect or are prepared for. Between 2020 and 2024, average consumer goods prices increased by 21%. This is close to double the inflation rate of the eight years previous to the pandemic. 

While some inflation is a normal economic condition in a growing economy, rapid inflation – where the price of living accelerates faster than wages – does the most hurt to the part of the population that’s dependent on regular paychecks. The wealthier members of society generally can leverage their assets to pay their expenses, and oftentimes asset values rise with inflation, blunting the harm of general price increases. This is a pressing issue in Mexico, the United States, and Canada where the top 1% control 47%, 32%, and 26% of their countries’ total wealth, respectively.

In the US and Canada, these disparities went up throughout the pandemic years, partially due to the higher-than-average inflation that pushed people living close to poverty over the line. Bitcoin and other cryptocurrencies present a promising solution for hedging against the effects of inflation and may be a helpful tool for middle and low-income families to preserve their wealth. 

Before we get into how Bitcoin can help during times of high inflation and economic inequality, let’s look into what exactly is going on with North American economies. 

Why Has There Been Higher Than Average Inflation in North America?

Inflation can happen when the money supply grows faster than a country’s economic output, which is exactly what happened in 2020 with the response to the COVID-19 pandemic. For several months, the economy was brought to a halt, with businesses forced to shutter their doors, leading to low levels of production. However, consumers continued to spend money on increasingly rare items. The rule of supply and demand took over and prices went up. The economy is still faced with some supply chain restrictions and certain industries are still not performing at peak productivity, which keeps inflation stubbornly high. 

To relieve some of the financial burdens of the economic shutdown, the U.S. printed unprecedented amounts of new dollars to fund economic stimulus packages, and Canada increased government spending. As a result, the United States money supply grew by 33% in just 2020. This was the fastest money supply growth the United States had ever seen. Typically, year-over-year money supply growth sits at 3-7%. Mexico, on the other hand, kept their spending relatively low, but still inherited inflation from supply chain disruptions and a shrinking workforce.

How Does Inflation Worsen Economic Inequality? 

As inflation increases, the value of government issued currency (fiat currency) weakens. People with higher incomes can typically offset these increases because they are much more likely to get inflation-based raises at their jobs every year, and locked-in mortgage rates keep housing prices low. Unfortunately, this is not the case for people on the lower end of the socioeconomic structure. Think about the federal minimum wage of $7.25 per hour, which hasn’t increased since 2009. Between then and 2024, prices increased by an average of 47%, so that $7.25 worth of goods and services in 2009 costs $10.66 fifteen years later. The spending power of a minimum wage worker is weak and getting weaker by the year.

Sadly, the effects of inflation are more grim than average baseline statistics show. The prices of lower-cost goods and services increase more quickly than goods marketed to wealthier families. This phenomenon is called inflation inequality, and it means lower-income families get hit hardest by inflation. As high-income families increase their wealth, businesses do their best to appeal to the disposable income of these people. In doing so, they begin to offer products and services at a price lower than the inflation rate. At the same time, lower-income families experience price increases among low-cost goods as the demand for basic commodities doesn’t change, but the price to produce goods does.

The Bitcoin Solution to Rising Inflation (and Economic Inequality)

Unlike the United States money supply, Bitcoin has a fixed limit of 21 million coins. This limited supply means that Bitcoin’s value resists inflation. In fact, Bitcoin’s value is deflationary, meaning its purchasing power is supposed to increase over time because as we get closer to the last coin, Bitcoins become harder to mine in a process called halving.

The financial impact of the COVID-19 crisis and its continuing aftermath create a unique set of conditions to test Bitcoin’s ability to be used as an inflation hedge. Since early 2020, the US dollar lost a considerable share of its value, while Bitcoin increased value by more than a hundred times. Even now, with inflation gradually returning to pre-pandemic levels, Bitcoin continues to reach new all-time highs.

Bitcoin allows for people to participate in the financial ecosystem with virtually no barriers to entry. Anybody with cash and a smartphone can download a wallet, find a Bitcoin ATM, and buy Bitcoin. Even people who cannot get a bank account can use engage in Bitcoin. It makes cross-border payments and money transfers affordable and easy, it is censorship-resistant, seizure-resistant, and easily returned to fiat through sell options. This means that anybody, even the least wealthy members of society, have opportunities to protect their money from inflation and engage in wealth building through asset growth.

Final Thoughts

Inflation is on the rise in the United States and the path to pre-Pandemic levels has not been charted. Increased inflation worsens economic inequality because it disproportionately impacts middle and low-income families, pushing them further into poverty. But based on Bitcoin’s performance compared to the Canadian/U.S. dollar and Mexican peso throughout the COVID-19 pandemic, Bitcoin presents a promising solution to mitigating the negative effects of inflation and lessening economic inequality.