Why is consumer credit interest called phantom inflation?  Because its impact on purchasing power is identical to traditional inflation with one glaring exception, it is not included in the traditional indexes that measuring inflation - it is invisible like a phantom.

A comparison of traditional inflation and phantom inflation.  Inflation is ia rise in the general level of prices of goods and services in an economy over a period of time - according to Wikipedia.  More simply an item that costs $1.00 today and $1.10 a year into the future would indicate an inflation rate of 10%.

Phantom inflation can be much more insidious in that it can increase the price of a product AFTER it has been purchased yielding the same net effect on the future purchasing power of the consumer.   By way of example if you purchased an item on credit for $1.00 a year ago and the credit card with an annual rate or 10% is not paid off for a year  the real price of that product is $1.10 - identical to an inflation rate of 10%.  This calculation is simple and assumes simple interest compounded annually, but it serves to illustrate the effect.

As long as consumers are able to pay off the full balance of credit card debt each month phantom inflation is insignificant.  However, if consumers carry a monthly balance and only pay a portion of the debt phantom inflation prevails.  For 2008 traditional inflation has fluctuate between about 1.5% and 5.6%, exluding December.  The question is what would these figures indicate if unsecured credit interest rates and late fees were included in these numbers.  Don't know?  Don't feel bad, neither does the Fed.

Putting all the pieces together it is little wonder that after hundreds of billions of bailout dollars there are very few, if any, hard numbers that indicate anything other than that the economic crisis has only been deferred.  Post-bailout sales figures are still dismal, the glut of products in the markets drowns the profits of corporations, and the employment numbers do not offer any promise either.  If anything the entire strategy behind the bailouts only serves to help phantom inflation flourish.

The whole concept behind the bailout was to "free up the credit markets" - a euphmisms for unleashing the phantom.  Consumers and the ecnomy need more credit like the US needs 4 more years of President Bush.  What consumers and the ecnomy need is cold hard cash in the short run, and a re-examination of the validity of the metrics that are used to shape economic and fiscal policy in the long run.  Of course, in the long run we're all dead so accurate numbers and metrics are optional.

Note: This article was written without a single drop of scotch.