Is inflation really so bad? The great scourge of the American economy – and the economic phenomenon that gives Greenspan and Bernanke nightmares – turns out to have some pretty progressive side-effects. This paper is from the December 2006 issue of the Journal of Political Economy:
This study quantitatively assesses the effects of inflation through changes in the value of nominal assets. It documents nominal asset positions in the United States across sectors and groups of households and estimates the wealth redistribution caused by a moderate inflation episode. The main losers from inflation are rich, old households, the major bondholders in the economy. The main winners are young, middle-class households with fixed-rate mortgage debt. Besides transferring resources from the old to the young, inflation is a boon for the government and a tax on foreigners. Lately, the amount of U.S. nominal assets held by foreigners has grown dramatically, increasing the potential for a large inflation-induced wealth transfer from foreigners to domestic households.
Keep this in mind the next time you hear about how wage growth for the middle class threatens to ignite an inflationary cycle.
Hat Tip: Marginal Revolution