With inflation rising faster than it has in the last four decades, economists are disputing whether the poor or the wealthy are the ones who suffer the most from it. This type of broad-based inquiry is difficult to answer, especially when inflation rates have been so low recently and hard data is sparse. It’s also not clear how to compare the losses suffered by the poor to those suffered by wealthier groups. Regardless, the arguments indicate that the poor are likely to suffer.
Tyler is correct in that this is a difficult topic to answer because the term “inflation” refers to a variety of diverse and seemingly unconnected occurrences.
Thus, “inflation” is a term used to describe an adverse supply shock that rises the price of specific goods while lowering real GDP.
Inflation can also occur as a result of a positive demand shock, which raises a wide range of prices while raising real GDP.
Unsurprisingly, the welfare impacts of a shock that reduces real GDP will be different from those of a shock that boosts GDP.
And that’s only the start.
It’s also important to distinguish between short and long-term consequences.
In the short run, I believe that a strongly expansionary monetary policy benefits both the poor and the wealthy (although for different reasonslower unemployment for the poor and higher real asset prices for the wealthy).
Nonetheless, I am opposed to such programs because I feel the long-term consequences will outweigh the short-term benefits.
Highly expansionary monetary policy, in particular, can lead to an unstable economy and a boom-bust cycle.
They also result in higher actual tax rates on investment income, which slows the economy.
The poor are the socioeconomic category that has the most difficulty purchasing a home, yet real estate appears to be one of the finest inflation hedges available. For a long time, especially throughout the recent inflationary period, real estate prices in the United States have been on a roll.
Rents are rapidly rising as a result of a combination of rising demand and constrained supply. The impoverished will be the biggest losers.
All of this is correct, however there is one caveat.
While real estate is an inflation hedge, I doubt that the current rise in real estate prices has had much to do with it.
Rather, home prices have risen in the twenty-first century as a result of a mix of NIMBYism and low real interest rates.
Monthly rents are not affected by low real interest rates, but NIMBYism and tougher regulations on mortgage lending to the working class do.
In an accounting sense, real estate is unquestionably a key component of “inflation.”
However, I believe that analyzing individual products such as housing in a microeconomic framework makes more sense.
What impact does a rise in the real or relative price of housing have on the poor?
To put it another way, one of the reasons Tyler’s question is difficult to answer is that it is actually a series of questions:
1. How does an expansionary monetary policy affect the poor and the wealthy?
Is there a difference between the short and long term effects?
Is the impact different depending on whether the policy was foreseen or not?
Is it dependent on whether the tax system is inflation-indexed?
2.How do NIMBY rules that make it more difficult to build homes affect the poor?
3.How do rules that limit health-care output and hence raise the cost of health-care affect the poor?
4.What impact would OPEC’s decision to reduce oil production have on the poor?
I could come up with a hundred more queries like this.
All of these things are grouped together as “inflation,” and they are all part of the inflation process in accounting terms.
However, they are two quite different questions.
1. Will the poor in America benefit (on average) if the Federal Reserve stated today that its future monetary policy would be little more contractionary than the markets now expect?
2. Will the poor in America benefit (on average) if the Federal Reserve stated today that its future monetary policy would be significantly more contractionary than the markets now expect?
I believe the first question has a yes response and the second question has a no answer.
If you asked me about the middle class, I’d give you the same two replies.
And if you asked me about the wealthy, I’d give you the same responses.
PS. Here’s an example.
If a patient inquired about the consequences of a fever of 101.4 degrees, the doctor might begin by determining the etiology of the fever.
Inflation is similar to a fever in that it is a symptom of underlying economic problems.
However, rather than focusing on the symptom, the attention should be on the underlying issues.
Who suffers the most from excessive inflation?
According to a new research released Monday by the Joint Economic Committee Republicans, American consumers are dealing with the highest inflation rate in more than three decades, and the rise in the price of basic products is disproportionately harming low-income people.
Higher inflation, which erodes individual purchasing power, is especially devastating to low- and middle-income Americans, according to the study. According to studies from the Federal Reserve Banks of Cleveland and New York, inflation affects impoverished people’s lifetime spending opportunities more than their wealthier counterparts, owing to rising gasoline prices.
“Inflation affects the quality of life for poor Americans, and rising gas prices raise the cost of living for poor Americans living in rural regions far more than for affluent Americans,” according to the JEC report.
Who is harmed by inflation?
- Inflation is defined as an increase in the price of goods and services that results in a decrease in the buying power of money.
- Depending on the conditions, inflation might benefit both borrowers and lenders.
- Prices can be directly affected by the money supply; prices may rise as the money supply rises, assuming no change in economic activity.
- Borrowers gain from inflation because they may repay lenders with money that is worth less than it was when they borrowed it.
- When prices rise as a result of inflation, demand for borrowing rises, resulting in higher interest rates, which benefit lenders.
Who suffers the most from inflation: the poor or the wealthy?
It’s a difficult topic to answer, but the research suggests that lower-income households will be hit the most.
Is inflation worse for the wealthy or for the poor?
Even though the specific implications are different, the study demonstrates that inflation anxieties are rising up the income ladder to those who can most afford higher costs. Inflation strikes most Americans in the form of increased food, gas, housing, and other living expenses. For the wealthy and affluent, inflation means rising interest rates, which raise borrowing costs and put downward pressure on asset values.
According to the poll, billionaires ranked inflation second only to government dysfunction as a threat to their personal wealth.
“The worry of inflation for most Americans is increased costs,” Walper added. “It’s also the concern of rising capital expenses for the wealthy.”
The majority of millionaires have faith in the Federal Reserve’s capacity to regulate inflation without causing prices or interest rates to spiral out of control. The survey found that 59 percent of millionaires were “confident” or “somewhat confident” in the Federal Reserve’s ability to control increasing inflation. And due to inflation, fewer than a third of millionaire investors have changed or plan to make adjustments to their investment portfolio.
Who suffers as a result of sudden inflation?
Unexpected inflation hurts lenders since the money they are paid back has less purchasing power than the money they lent out. Unexpected inflation benefits borrowers since the money they repay is worth less than the money they borrowed.
Which of the following groups is unlikely to suffer losses as a result of unexpected inflation?
The menu costs of inflation are the charges imposed on a business as a result of changing advertised pricing. Which of the following groups is unlikely to suffer losses as a result of unexpected inflation? Those whose contracts include cost-of-living adjustments in their pay.
Who is in charge of a country’s monetary policy?
The Reserve Bank of India (RBI) is charged for implementing monetary policy in India. The Reserve Bank of India Act, 1934, expressly mandates this obligation.