Which social groups and classes should fear higher price inflation?

Paul Krugman considers who is helped and hurt by higher rates of price inflation, and he sees the big losers as the wealthy oligarchs (and see his column today here).  In contrast, I see the big losers as those with protected service sectors jobs who do not wish to have their contracts reset.  If you are a schoolteacher, a nominal wage cut is likely to mean a real wage cut because you don’t have the power to renegotiate into a deal as good as the one you started with.  The declining labor mobility of the United States in general means that workers are more vulnerable to higher rates of price inflation.  A guy living in Cleveland who plans on leaving for Houston is probably less worried about nominal variables, because he will be doing a new contract negotiation anyway.

We all know that inflation is extremely unpopular with voters.  We also observe that inflation remains extremely unpopular in a variety of northern European economies, which typically have more egalitarian distributions of income (though not always wealth) than does the United States.  In any case the top 0.1 percent in those countries has less wealth per capita than in the U.S. and, at least according to progressives, less political influence too.

Of course the ability of inflation to erode rents is one of its virtues.  The super-wealthy are often earning rents, but typically those rents are structured to be relatively robust to changes in nominal variables.  For instance the rent might take the form of IP rights, or resource ownership rights.  Simple loans of money, as we find in traditional creditor-debtor relationships, just aren’t monopolizable enough or profitable enough to be a major source of riches for the most wealthy.

I was puzzled by this comment on Krugman’s:

But there is one small but influential group that is in fact hurt by financial repression which is just like what Hitler did to the Jews: again, the 0.1 percent.

People that wealthy can put their money into hedge funds, private equity, private capital pools, and the like.  Of course there is risk involved but they have a chance as good as anyone to earn the highest rates of return prevailing in an economy, through creative uses of equity and on top of that very good accountants and tax lawyers.  The very wealthy also have the greatest ability to hedge against inflation using derivatives and commodities, if they do desire.

In other contexts, Krugman (correctly) stresses that price inflation lowers the real exchange rate of a country (and thus is not neutral, supporting the view that nominal variables really do matter).  So one big group of gainers from domestic inflation are those who invest lots of money overseas, wait for some inflation, and eventually convert their foreign currency holdings back into dollars for a very high net rate of return.

Which group of people might that be?  The super wealthy of course.  (This internationalization of returns for the super wealthy, by the way, is one big difference between current times and the 1970s.)

I am not suggesting that the very wealthy are out there pushing for higher inflation.  But they are much more protected against such inflation than Krugman’s analysis suggests, and the middle class in protected service sector jobs is more vulnerable than is usually recognized.  There is a reason why 4-6% price inflation has become the new third rail of American politics.

Addendum: Here are some related comments from Brad DeLong.  I understand the very wealthy as believing (rightly or wrongly) that higher rates of price inflation increase economic uncertainty without providing much in the way of benefit for the real economy.  So, given that belief, why should they favor higher price inflation?  Since the status quo is based on low rates of price inflation, a switch to higher inflation would in fact disrupt markets (for better or worse), which would send a kind of self-validating short-run signal, at least apparently affirming this view held by the super wealthy that inflation will increase economic uncertainty.


Whenever I surf "personal finance" forums these days, there's always a significant amount of talk about Treasury Inflation-Protected Securities and how to use them in tax-deferred accounts. Has their introduction in 1997 and widespread use today changed the game at all for people's attitudes toward inflation?

A similar question: Say, more and more contracts & transactions started including inflation compensation clauses would that in effect dull the utility of any sort of monetary policy?

Wage indexation raises the 'sacrifice ratio', and makes monetary stimulus less effective. Indexed sovereign debt lowers the fiscal demand for inflation.

The claim isn't that everyone in the bottom 99.9% is helped by inflation and nobody in the top 0.1% can't protect themselves against inflation. Krugman is merely comparing the relative impact of deflation and recession to that of inflation on the two groups.

As for teachers and police officers with union contracts---these are renegotiated every few years anyhow. If they don't have cost of living adjustments built into the contract, they will almost certainly negotiate a "catch up" should the inflation spike. Unless the spike is exceptionally large, few would have really large hits before a scheduled renogiation.

But consider the alternative----more people, including teachers are unemployed (municipal and state governments reduced employment in the last recession)-- and have greatly reduced income.

I is confused. Back when I took economics (a long time ago as I decided to make an honest living) I thought the supposed benefits from inflation was that it reduced wage rigidity and encouraged people to spend instead of save. Translate this is into real terms and I thought it meant that inflation makes it easier to pay people less in real terms and kills the income of seniors who depend of safe interest bearing security for their retirement income. So to me it seems as if wage earners and seniors are hit by inflation to help employers and the unemployed. I don't get how that hurts the .1% more then the rest unless they are trust fund babies.

As for teachers and police officers, either you have not been paying attention or your state is greatly different than mine. In addition to laying people off, governments in my area have been been holding contracts to no cost of living increases and are using inflation to claw back some of the salary gains they made back when times were good. I don't here a lot of sympathy for them (especially since a lot of private sector workers in the area are in the same boat). Nonetheless, they have no reason to look forward to higher rates of inflation as they are locked into multi year contracts.

I should also note that wither it is rational or not, the elderly seem the most upset by inflation. Given that the elderly are fastest growing class in America and they most reliable voters, it can only increase the anti-inflation sentiment in American politics.

It is interesting that the most anti-inflation nation, at least by actual policies, in recent times has been Japan, which also has one of the most elderly societies in the world. Yes, in a high inflation world, you can protect yourself on a risk adjusted basis to keep consistent with inflation. But the standard deviation of returns becomes much higher in a high inflation world as holding cash is no longer an option. The elderly will weight downside risks much higher than upside ones, because there is little opportunity for them to earn back any losses and their lifestyle is already pretty fixed. But in terms of the US, actually the demographics are fairly healthy so probably there is less pressure at least in the medium term to become more like Japan. This is a bigger concern for Europe though and also China in the longer term, with the one child policy kicking in.

"The claim isn’t that everyone in the bottom 99.9% is helped by inflation and nobody in the top 0.1% can’t protect themselves against inflation."

Nobody has made this claim.

" Krugman is merely comparing the relative impact of deflation and recession to that of inflation on the two groups."

And, as usual, has overstated his case, and has ignored the parts that are inconvenient to his argument.

But consider the alternative—-more people, including teachers are unemployed (municipal and state governments reduced employment in the last recession)

You're arguing that somewhat higher price inflation is a good thing (and I agree.) Why? What is the mechanism by which you claim it would work? If the problem is downward nominal rigidity in wages (people resist nominal wage cuts), then higher inflation can only be useful by allowing some workers to accept lower real wages without nominal wage cuts. That's the classic Keynesian explanation for involuntary unemployment.

Do you believe that unions and their negotiators are any more flexible when it comes to nominal wage cuts? You mention COLAs; note that many COLAs (including those used for government benefits like Social Security) are not allowed to fall below zero. Doesn't your argument that COLAs, explicitly bounded below at zero, tend to be included in union contracts make it more, not less likely, that they would have wages vulnerable to real cuts if inflation were higher?

"If you are a schoolteacher, a nominal wage cut is likely to mean a real wage cut because you don’t have the power to renegotiate into a deal as good as the one you started with."

This essentially applies to people in jobs with strong unions. But for them, won't most wage contracts already have factored in some form of inflation hedging by tying to an index or something similar?

New York City municipal unions received a 4 percent annual raise in 2009 and 2010, despite inflation running nowhere near that. NYC teachers are asking for retroactive 4 percent annual raises in their new contract.

Note that the teachers have been working without a contract for a couple of years because of wages, largely. The city has here used the option of working under an expired contract, something where higher price inflation would cause lower real wages.

In the story, observe that New York State unions reached an agreement with Gov. Cuomo for a three year wage freeze, followed by two percent increases in Year 4 and 5 of a five year contract.

It's simply inaccurate to think that large public worker contracts are largely determined by inflation-matching COLAs.

In many public jobs, cost of living raises have been suspended, while seniority raises have been preserved; that holds true for federal workers as much as NYC teachers.

Correct. Pay for the nonunion federal workforce has been essentially frozen since 2010 (this year the freeze was thawed by a 1% raise). Although seniority-based raises still take place, they do not always keep up with current inflation and definitely would not keep up with high inflation.

FWIW it's been frozen for the unionized workforce, or at least some of it, as well.

In an agency that's maintaining its workforce, or steadily expanding, seniority raises are at a steady-state - every year some high-seniority workers retire and are replaced by low-seniority workers, balancing out the increase in everyone else's seniority, and thus preserving real average labor costs. (Or lowering them if COLAs don't actually keep up with changes in the COL.)

A problem arises when there's a hiring surge followed by a hiring freeze with cutbacks by attrition - the mean seniority level keeps increasing for a while, increasing the real average labor cost over time.

Public employees should have to bid for their jobs annually, the low bidder being hired, just as the suppliers of paper clips, pencils, printer cartridges, etc. must submit a lower bid to be accepted. Recognition of public employee unions has been a huge mistake.

>Recognition of public employee unions has been a huge mistake.

Yes, but only for the taxpayers, and the country as a whole.

Public union members, and the Democrat party that they are forced to contribute to via dues, have made an absolute killing. So three cheers for them!

"In 1962, President John F. Kennedy planted the seeds that grew the modern Democratic Party. That year, JFK signed executive order 10988 allowing the unionization of the federal work force."


Not all contracts are low-bid, and usually agencies that rely exclusively or heavily on low-bid as the determining criteria get burnt by companies that can't actually complete the contract for the bid price.

Where you are in your life cycle can have a big impact on your view of inflation. Older people are less likely to like uncertainty, more likely to be sensitive to inflation in select sectors of the economy. How do you hedge against health cost increases?

Who doesn't fear the prospect that you are saving toward some future goal only to discover that factors beyond your control have moved the goal out of reach? You achieved your saving goal but the ultimate goal remains out of reach. How does that ripple through the incentives in society?

I don't fully understand the unionized public sector being at greater (or lesser) risk from inflation. Other then older voters fearing inflation pushing back harder against public sector wages. But that seems to vary by community.

What is worse? Unexpected inflation or a steady inflation rate.

if I were superrich I'd fear high and accelerating inflation, I'd fear deflation and increasing unemployment, and I'd fear the conspicuous consumption of my peers. I'd fear all these as tending to promote some sort of wealth-grab. I'd approve of steady-as-you-go, and the rich behaving with propriety, restraint, and good manners. What chance in the US?

propriety and restraint? What sort of nonsense is that? Who are you to know how others should best use their money?

"If I were…."

If you were....what? Spit it out man!

Rich in US have avoided conspicuous consumption since the 30's. There have been ups and downs in CC over the decades, but US rich avoid it relative to other nations.

Note distinct lack of jewels, ostentatious clothes, Rolls Royces in LA, DC, NYC relative to Moscow, Hong Kong, Monaco.

No, old money has not been conspicuous consumers since the 30s. Other Americans, less so. Look at the Stretch Limos, the watches, the bling. Donald Trump is not shy of displaying his wealth. Nor is Jay Z.

Both of their livelihoods consist of cashing in on their "wealthy" lifestyle.

It's all fairly irrelevent at any rate Bitcoin is about to become the only payment method in the world (over the next 10 years) and it has a built in deflationary bias which should cure any inflation worries.

We are close to a breakthrough on quantum computing, then your Bitcoins will all belong to someone else.

Of course this is nonsense otherwise the market would predict this and the price of Bitcoin would be plummeting, and yet Bitcoin keeps surging despite the naysayers.

Doesn't inflation hurt creditors and benefit debtors? The assumption that inflation hurts wage earners is the assumption that there isn't a free labor market. Protected service sector jobs with bargaining power will bargain right past inflation. Those without bargaining power were on the way to reduced compensation anyway. Middle class people also hate inflation because inflation means a presumption of further inflation which leads to high interest rates for things like cars and mortgages and education. People in general don't like inflation because the story about debasement is very intuitive and in line with ancient wisdom and the Keynesian story is very counter intuitive--how can profligacy be a good thing?

Inflation is a wealth tax. Demographically, wealthy people are old people. Inflation is a tax on old people. Old people are increasingly baby boomers. Baby boomers are the profligate jerks that put us in this rotten fiscal situation.

Inflation solves a lot of problems.

1. Yes, the average age of wealthy persons is higher than the average age of all persons. The effect of inflation is to reduce the purchasing power of a nominal amount of income or assets. It is not likely that the purchasing power of the cohort of elderly wealthy persons is reduced as much as other cohorts for the simple reason that these persons will not consume all of their assets and associated income before death (even with high inflation) and therefore do not need to reduce their consumption. The primary negative effect of inflation is therefore is likely not on wealthy old people but the heirs of wealthy old people.

2. Demographically, the largest percentage of poor persons who rely on a fixed, non-negotiable income (social security) are the elderly. While social security is COLA adjusted, it is adjusted only annually and retroactively. Consider the purchasing power of social security when inflation is persistently 1 percent. On January 1 of each year social security is adjusted upwards by 1 percent to account for inflation *in the prior year*. If one percent inflation ratably persists in the following year, the loss of purchasing power is one-half of one percent. But, if inflation increases to be persistently 10 percent, the loss of purchasing power is 5 percent. Unlike wage earners, this cohort of the elderly have no ability to negotiate anticipated future inflation.

Per the Social Security Administration:

"Among elderly Social Security beneficiaries, 22% of married couples and about 47% of unmarried persons rely on Social Security for 90% or more of their income."


"But there is one small but influential group that is in fact hurt by financial repression which is just like what Hitler did to the Jews: again, the 0.1 percent."

This is related to the above comment. Take Warren Buffett who is "elderly" or even Bill Gates (who is not yet). Even if Buffett and Gates would not be able to offset the effects of high inflation through planning (as suggested by Cowen) *they* would not effectively be "hurt". They are not even close to consuming their existing assets and income. Rather, the present and future beneficiaries of the Bill and Melinda Gates Foundation would be "hurt" and my understanding is that these persons are not in the 0.1 percent.

It is not a wealth tax.

It's a tax on cash, but wealth held in businesses or housing would not be impacted outright.

Actually, it is a tax on any wealth that is placed in fixed/income investment vehicles; i.e. bonds, CD's, etc...held more by older / retired people than any other demographic group. Businesses and housing are far from the only, or even most predominant, type of non-cash holding.

This was a powerful post by TC that I'm afraid the comments so far have missed. What TC is saying is that *if* XYZ then ABC. It's a speculative theory that is very hard to grasp but requires a careful reading. Not unlike a very sharp position in chess. It's not just one theme but many. PS--I am playing awesome chess lately...again. It comes and goes, like mojo.

The biggest surprise in TC's post for me was that the rich would benefit from foreign currency appreciation even while subjectively fearing inflation due to business uncertainty. That was interesting. Also his side point that there is a bias against inflation, the third rail, in the same way there is a bias against cutting social security benefits. Anytime there's a taboo subject it is bad, and this is an example. The same thing (say the Keynesians) happened in Japan: Japan refused stimulus whole-heartedly for 20+ years, and only now, belatedly, is JP doing Abenomics (and with baby steps say some). Let's let inflation rip says Krugman, DeLong, and the other Keynesians: and who knows, the economy being nonlinear this may have a beneficial one-off effect akin to increasing productivity by dimming (or brightening) the factory lights.

Maybe I am unique or something, but my family income puts us in probably the top 1-2% and I think higher inflation would be good for my financial position (or at least neutral).

I have a low fixed rate mortgage and substantial equity in my home. Any home price inflation would be a big plus. Most of my financial wealth is in equities (including foreign equities) which should be fairly immune to inflation.

I consume relatively little in food and energy as a percentage of my budget. Maybe if I were a big consumer of luxury goods it would be different.

The market for my skills is fairly competitive (relatively low unemployment for educated workers) so wages are likely to be fairly flexible.

Most of my coworkers are in a similar situation. It seems to me that inflation would be waaaaay worse for the poor who spend a higher percentage of income on food and energy, may not own their homes, have floating rate debt (credit cards), and are subject to a weaker employment market.

I had the same reaction - similar situation to yours.

Not in your income bracket, but I share your analysis.

I also concur with this analysis. Perhaps the elephant in the room is that a large percentage of the population, even in a wealthy country like the US, lives "paycheck-to-paycheck." Home ownership in expensive coastal cities is simply unattainable for most lower- to middle-income families. (That changed briefly in the 2000s, thanks to reckless lending criteria and shifting of risk, with catastrophic results.). In terms of cash flow, for those skating on thin ice, an increase in nominal prices or adjustable interest rates could jeopardize their ability to pay the rent or mortgage, insurance premiums, etc. Those with higher incomes or greater wealth have access to many other sources of cash flow to mitigate or ride out an inflationary spike.

At least some defined benefit pensions are not indexed to inflation. For example, I live in PA, and here the teachers, state employees, and I believe police pensions are set as an unindexed % of final salary. Any increases, and there have been occasional ones in the past, are done by ad hoc legislative vote. The result is that the current generation of retirees, say from the early 1990s until now, have benefited from the long term low inflation conditions, because their nominal pensions are eroding much more slowly than those who retired in the 70s and 80s. If inflation were to increase, then the real burden to the taxpayers would be reduced, and at the same time the contributions from current workers would be increased.

The "rate of inflation" as measured by the big Fed index(es) has only limited value in understanding how people in the economy are being hurt. Krugman has pointed out that commodity prices move up and down based on a lot of factors unrelated to "inflation." Because of that, Krugman has argued that, even if the Fed increased interest rates, the price of gas, food, etc would not necessarily decrease.

At the same time, economists like Dean Baker have argued that keeping interest rates low, which pushes down the value of the dollar relative to other currencies, has the beneficial effect of making US goods cheaper to the global consumer, which creates US jobs. But (somehow) this does not have the effect of making food and gas from other countries more expensive for US workers. I haven't quite been able to wrap my head around that.

It seems like the progressive economist's cream dream would be basically zero interest rates forever. This would create US jobs, and never result in higher gas and food prices because those things are basically determined by other factors anyway. It's a win-win and nobody every gets hurt, except for, of course, the evil 1%.

But today Tyler says the 1% are not really hurt by low interest rates, because, essentially, their money is in essentially inflation-indexed investments anyway. So, it's not just a win-win. It's a win-win-win!

I guess the only people hurt by these low interest rate, high inflation policies, if they do have any effect, are those who use dollars as a store of value, which is, of course, what they are, as taught in Econ 101. Suckers.

The thing is, the poor don't have any wealth to store so don't care about the dollar depreciating, the rich have no problem diversifying their wealth into fairly inflation-hedged assets, and the middle class has most of their wealth in their home and their retirement accounts, which shouldn't be just sitting in dollars. Above a 6 months of spending safety fund, it doesn't really make sense to store your value in currency. Diversify into productive assets, or at least interest bearing ones, with some hard assets like gold as well. If you are just parked in dollars with all of your wealth you are doing it wrong.

The thing is, the poor don’t have any wealth to store so don’t care about the dollar depreciating

Sheesh! Just because they don't have a lot of wealth doesn't lead to your conclusion!

I'm surprised no one got it yet. Inflation is bad for businesses that have high labor costs. Low inflation or deflation suggest tight money and low NGDP growth. This leads to high unemployment and loose labor markets. High unemployment leads to lower wages. Lowering wages reduces costs for many firms, resulting in higher profits.

And indeed since the recovery began and interest rates remained at record lows; unemployment remains high, median wages are down, and corporate profits are at record highs. Why is this so hard for economists to understand?

It's an interesting question whether high *and variable* inflation helps the wealthy--- that is, if economic uncertainty helps them. I should think it would. Uncertainty makes for a higher return to information, and information has economies of scale. The wealthy hire financial advisors who can see the wave coming and ride it.

"The wealthy hire financial advisors who can see the wave coming and ride it."

So that's how it is, financial advisors are able to predict the future, kind of like voluptuous Gypsy women staring into crystal balls, who are somewhat cheaper.

Financial advisors to the wealthy should be able to profit handsomely from future economic uncertainty, even if their clients don't.

Sure, a cheap voluptuous woman. In your dreams, Chuck.

Who is hurt by inflation. Inflation is a fall in the value of the dollar. So, people who have lots of dollars are going to be hurt more. But a billionaire loosing a few million is not as sad a story has a hundred-thoudandare losing an equivalent percentage of his wealth.

And, the super wealthy are likely to have a combination of real and financial assets. The real assets hold their value.

The group most hurt by inflation would be middle-class and upper-middle-class retirees, and soon to be retirees. Those who expect to use moderate savings to enjoy their retirement years, and find that those savings don't go as far as planned.

"The group most hurt by inflation would be middle-class and upper-middle-class retirees, and soon to be retirees. Those who expect to use moderate savings to enjoy their retirement years, and find that those savings don’t go as far as planned."

This seems the most logical point to me. I think the groups most negatively impacted would be the middle-class retiree's followed by the poor.

I'm curious what percentage of today's workforce is "protected service sector jobs." My sense is that that group has been dwindling throughout my lifetime (i.e., since the 1970s) along with the decline of unions, migration of jobs to sunbelt states, outsourcing, and use of contractors rather than employees. Anecdotally, in 18 years as a business lawyer, I have never seen a union labor agreement; of the multi-year employment agreements I've seen, the vast majority have been for C-level executives. Just one data point.

Presumably he's including public sector jobs.

But ask a different question: how did the 70s get framed as the ultimate bad time?

Krugman the Keynsian forgets that the 70s were the heyday of *stagflation.* (If it's impossible in the models, it must be impossible in reality, right?) So you have the combination of a slow growth economy, high inflation, and large price shocks from the various oil crises.

In a slow growth economy, high inflation makes it very easy for labor to get squeezed on both ends. There's downward pressure on wages, because employers can slow-walk raises. There's upward pressure on prices, especially if you add in exogenous price shocks (the price of food and oil are big components of perceived inflation, but are not included in the official measurement).

A third way in which workers get squeezed is through decreases in quality, as suppliers try to avoid price increases or put off capital investments.

So Krugman's hypothetical worker in the '70s is tied to his job (nobody's starting businesses or making long term investments with double digit interest rates). He can argue for a raise, but only every so often, and when he does so he's bargaining with an employer who's also feeling squeezed. When he goes to the gas pump, he sees soaring prices and outright shortages, and when he goes to the dealership for a new car, he's looking at some of the worst cars ever made.

Add in a nice surge in violent crime and a few assassinations, and you have a decade that a lot of people don't remember fondly.

All of this is really obvious to anybody who has read about the economic experience of the '70s (as opposed to official, academic analyses of the macroeconomy). People are always complaining about getting squeezed on prices, or that the cars the Big Three are putting out are awful. Negotiations for raises and inflation adjustments are very contentious and fraught. Tax increases are a huge issue because nominal wage increases are pushing people into higher tax brackets without any corresponding increase in buying power.

A good place to pick up on things like this are the collected anthologies of weekly columnists like Milton Friedman, William Buckley, or even Art Buchwald. Because they're put out on a weekly basis, they tend to follow current events and the national conversation fairly closely.

Paul Krugman is dedicated to fighting the .1%, right down to the last average American.

You comingle the concepts of "price inflation" and "inflation". "Price inflation" excludes rises in wages, while "inflation" includes them. Krugman is pretty careful to only talk about "inflation" where wages rise along with goods and services prices, while this post seems to waver between the two as if they were equivalent. Yes, salaried workers should indeed fear "price inflation", but they should not fear "inflation" per se. Owners of nominal assets should fear both.

Your point about how the rich can hedge against inflation by owning real assets is valid, but beside the point. The rich are also the largest owners of nominal assets, so they have the most to lose from inflation (of either kind) among all groups in society. After all, *someone* has to own the nominal assets in existence.

As Krugman points out one of the points of higher inflation is too avoid the lower zero bound by allowing more negative real rates of interest; this is a real effect which should translate into lower returns on other assets if one models them as having the return of government bonds plus a risk/liquidity bonus.

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