Hot Inflation and the Capital Gains Tax

By SBE Council at 12 May, 2026, 4:03 pm

by Raymond J. Keating -

According to the U.S. Bureau of Labor Statistics, Consumer Price Index (CPI) inflation in April registered 0.6 percent. That compared to 0.9 percent in March. These past two months ranked as the worst inflation performance since June 2022.

For the first four months of 2026, inflation has been running at roughly a 6 percent annual pace.

Of course, skyrocketing energy costs related to the Middle East is a key reason, along with the Fed providing loose money since 2008. As we've seen with the pandemic and related ills, and now the Iran war, the Fed's loose money has provided the necessary kindling for inflation. As always, the key question and challenge becomes wringing inflation out of the system once it has been unleashed. No easy task, to say the least.

For good measure, this is another moment providing unfortunately clarity on why capital gains must be indexed for inflation. If not, as is the case now, inflation cuts into returns, and the real capital gains tax rate (currently a total top rate of 23.8 percent) jumps markedly higher. Indeed, the higher the inflation rate, the lower the real capital gains tax rate - to the point where a tax being paid on a nominal capital gain can wind up being a tax paid on a real capital loss. (See this SBE Council analysis.)

The U.S. economy needs to enhance incentives for entrepreneurship and investing in businesses. That means policymakers at the federal and state levels should, among other policy measures, index capital gains for inflation.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. He is the author of " The Weekly Economist " book series, and 10 Points from Walt Disney on Entrepreneurship .