Is Inflation Good For the Rich?

Felix Salmon sez:

Inflation is painful for the poor, but much easier for the rich, whose wealth is tied up in things like stocks and houses which tend to retain their real value.

Hmmm. I haven’t thought about this in a long time. Historically, of course, inflation was generally a populist favorite because it reduced the real value of debt. Conversely, “sound money” was preferred by the banking class for exactly the opposite reason. They were the ones making the loans, and they didn’t want the value of those loans to be eroded.

Of course, that was back in the day of fixed-rate lending. If you owed the bank a fixed $500 per month on your seed loan and inflation skyrocketed, that $500 became pretty cheap and farmers rejoiced. J. Pierpont Morgan, on the other hand, was not amused.

But what about an industrial era where loan rates are variable and everything is indexed to inflation? Then who benefits (relatively speaking) from inflation? That’s an empirical question, and Romer and Romer provided the following answer in 1998:

We find that the short-run and long-run relationships go in opposite directions. The time-series evidence from the United States shows that a cyclical boom created by expansionary monetary policy is associated with improved conditions for the poor in the short run. The cross-section evidence from a large sample of countries, however, shows that low inflation and stable aggregate demand growth are associated with improved well-being of the poor in the long run. Both the short-run and long-run relationships are quantitatively large, statistically significant, and robust. But because the cyclical effects of monetary policy are inherently temporary, we conclude that monetary policy that aims at low inflation and stable aggregate demand is the most likely to permanently improve conditions for the poor.

A couple of years later William Easterly and Stanley Fischer took another look at the data and concluded that inflation had a very mild but negative impact on the poor, and that in polls, “the disadvantaged on a number of dimensions — the poor, the uneducated, the unskilled (blue collar) worker — are relatively more likely to mention inflation as a top concern than the advantaged.”

This doesn’t tell us anything about moderate levels of inflation — say, the difference between 2% inflation and 5% inflation. It’s more geared to general long-term stability. Still, the days of yeoman farmers demanding free silver at 16:1 are just a memory. Today a bout of inflation just jacks up the rate on their credit card balances.