Wealthier people benefit from inflation, while the working class bears the costs
Timothy P. Carney
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Inflation is 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 imposes economic and emotional costs.
But aside from these frictions, what are the actual costs of inflation? A new working paper examines that and concludes that inflation’s harms fall mostly on the poor and 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.
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“Is There Really an Inflation Tax? Not for the Middle Class and the Ultra-Wealthy” is the title of the paper by 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.