Inflationis very annoying for normal people. The sight of prices rising is dispiriting. Budgeting across months and years becomes more difficult when prices go up rapidly. Uncertainty imposeseconomicand emotional costs.
But aside from these frictions, what are the actual costs of inflation? A newworking paperexamines that and concludes that inflation’s harms fall mostly on thepoorand working class. When inflation is at normal levels, the paper argues, the middle class also benefits. At recent very high levels, though, the median resident suffers along with the poor.
“Is There Really an Inflation Tax? Not for the Middle Class and the Ultra-Wealthy” is the title of thepaperby New York University economist Edward Wolff.
He has a fairly simple model that weighs the costs of inflation (how much it reduces the value of a worker’s wages) against the benefits of inflation (how much it increases the value of a worker’s assets, such as stocks or real estate). What matters here is that at different income levels, the average person has a different balance of assets versus income, and this affects the impact that inflation has on different people.
Super-wealthy people own lots of stuff and don’t really need to make income, and so they see their stocks and homes go up in value. Poor people don’t own much, and so they just get the part of inflation where their income becomes less valuable.
The middle class typically benefits from inflation because the middle class typically has a lot of debt. Think of someone who owes $100,000 on a $200,000 home. Inflation makes the home more valuable and the debt relatively less onerous.
But Biden-era very high inflation is less helpful to the middle class. Wolff writes:
What about the recent surge of inflation? An annual inflation rate of 8.0 percent over years 2016-2019 would lead to an inflation tax on real median household income of $15,100 (assuming that real income growth remains unchanged), which is up by almost 350 percent compared to the actual rate of inflation in the base case. It would also lift median net worth by $11,100 or by 223 percent more than in the base case. In this case, the income effect dominates the wealth effect and the average family will now be behind on net with this inflation spurt, and the net inflation gain would now be -$4,000.
That is, under ordinary inflation, the poor and working class lose. And under Bidenflation, the middle class also loses. But the wealthy come out ahead, so it’s not all negative.
FAQs
In fact, the upper middle class and the top 1% of Americans have actually benefited from high inflationary periods, increasing their wealth, while lower-wage families have been negatively impacted, according to a working paper by economist Edward Nathan Wolff for the National Bureau of Economic Research.
Who is benefited most from inflation? ›
Inflation brings most benefits to debtors because people seek more money from debtors in order to meet the increased prices of commodities.
Who benefits financially from inflation? ›
Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.
How does the middle class benefit from inflation? ›
The middle class typically benefits from inflation because the middle class typically has a lot of debt. Think of someone who owes $100,000 on a $200,000 home. Inflation makes the home more valuable and the debt relatively less onerous.
Does anyone profit from inflation? ›
Several asset classes perform well in inflationary environments. Tangible assets, like real estate and commodities, have historically been seen as inflation hedges. Some specialized securities can maintain a portfolio's buying power, including certain sector stocks, inflation-indexed bonds, and securitized debt.
Is inflation good for the poor? ›
rates also had higher poverty rates. find that lower inflation tends to increase the income of the poor over the longer term a result they attribute in part to the negative association between inflation and economic growth.
Who does not benefit from inflation? ›
In summary: Inflation will hurt those who keep cash savings and workers with fixed wages. Inflation will benefit those with large debts who, with rising prices, find it easier to pay back their debts.
Who benefits from inflation and who doesn t? ›
The redistribution effect of inflation
Lenders are hurt by unanticipated inflation because the money they get paid back has less purchasing power than the money they loaned out. Borrowers benefit from unanticipated inflation because the money they pay back is worth less than the money they borrowed.
Who is harmed from inflation? ›
Since inflation reduces purchasing power, consumers represent the primary group who stand to lose when prices rise. That's because their money doesn't go nearly as far and allows them a limited number of goods and services they can purchase.
Who in an economy is the big winner from inflation? ›
The big winner from inflation in an economy is the borrower and the government being the biggest borrower benefits the most from inflation. The rise in inflation will lead to higher income but the loan to be repaid remains the same.
Unfortunately, prices can suddenly jump, so it's wise to be financially prepared. So, why are retired people hurt by inflation? “Retirees don't necessarily have income, meaning they need to make that lump sum last as long as possible, and high inflation erodes those savings,” Benson says.
Is cash king during inflation? ›
Inflation: Inflation eats away at the purchasing power of cash. Because of that and the low yield of cash assets, cash steadily loses value. The time value of money: Because of inflation and other factors, cash is worth more now than it will be in the future.
Why does inflation not affect everyone the same? ›
"The economy is made up of billions of prices, all moving differently." Economists have long been aware that groups might face different inflation rates because of different consumption patterns.
Are real wages up in the US? ›
Real average hourly earnings increased 0.6 percent, seasonally adjusted, from March 2023 to March 2024. The change in real average hourly earnings combined with no change in the average workweek resulted in a 0.6-percent increase in real average weekly earnings over this period.
When was the US economy at its peak? ›
The most vigorous, sustained periods of growth, on the other hand, took place from early 1961 to mid-1969, with an expansion of 53% (5.1% a year), from mid-1991 to late 2000, at 43% (3.8% a year), and from late 1982 to mid-1990, at 37% (4% a year).
Is inflation worse for the rich? ›
So yes, inflation has been higher for lower-income Americans. But the spread from bottom to top, 1.5 percentage points, is much smaller than the spread in Dube's wage data in the chart above.
Does inflation hurt the rich or the poor more? ›
Prior research suggests that inflation hits low-income households hardest for several reasons. They spend more of their income on necessities such as food, gas and rent—categories with greater-than-average inflation rates—leaving few ways to reduce spending .
Are millionaires affected by inflation? ›
For the wealthy and affluent, inflation brings the threat of higher interest rates, which increases the cost of borrowing and can put pressure on asset values. According to the survey, millionaires ranked inflation as the second biggest threat to their personal wealth, right after government dysfunction.
How do the wealthy beat inflation? ›
By limiting your cash holdings, investing in value-preserving commodities like gold and investing in companies with pricing power that can more easily navigate robust inflationary periods, you can be a better steward of your wealth and protect it from inflation.
