The Tax Nobody Votes For: Inflation, Deficits and the Quiet Erosion of Real Wealth

Persistent inflation and large government deficits are likely to keep eroding real wealth and limit the return of interest rates to their pre-pandemic lows.

• US consumer prices rose 3.7% year over year in September, while real average hourly earnings fell 0.7%; inflation has remained above the Federal Reserve's 2% target for more than five years.
• Australia's CPI inflation reached 4.3% in September, with trimmed-mean inflation at 3.7%, prompting the Reserve Bank to raise its cash rate by 25 basis points to 4.85%, the fifth increase of 2026.
• The US federal government recorded a US$1.99 trillion deficit in fiscal 2026 after spending about US$7.4 trillion against US$5.4 trillion in revenue, while gross federal debt exceeded US$40 trillion and net interest costs surpassed US$1 trillion annually.
• The US 10-year Treasury yield reached 5.31% in early October before easing to around 5%, leaving a limited real return against 3.7% inflation and exposing long-duration assets to persistent price pressures.
• A term deposit earning 4.85% produces about 3.4% after tax for an investor paying a 30% marginal rate, implying a real return of roughly minus 1% against Australian inflation of 4.3%.

Takeaway: Investors should judge returns after tax and inflation, favour businesses with pricing power and sensibly priced real assets with sound balance sheets, and treat excess cash and long-duration assets as vulnerable if inflation remains persistent. The article also recognises that falling energy prices or an economic slowdown could restore the appeal of high-quality bonds.