Edward Wolff from New York University estimated inflation in the United States from 1983 to 2019

Discussions about which part of society benefits more or less from high or low inflation are popular among journalists, but work by economists on this subject is relatively rare. A paper by Edward Wolf of New York University provides a suggested answer for the United States 1983–2019. He estimates that inflation during this period enriched the middle class and reduced the welfare of the poor—and at the same time contributed to the fight against inequality.

Edward Wolf, who wrote the first significant work on the relationship between inequality and inflation back in 1978, in a series of NBER preprints in October published the results of several years of work with recent detailed statistics from the US Federal Reserve on the welfare of income groups in the United States in dynamics – these data are increasingly details are available for 1983–2019. The work begins with a review of the literature on this topic, showing that, despite its high popularity among publicists, columnists and on social networks, economists know relatively little about how inflation affects welfare in different income groups and have mainly focused on the private effects of monetary credit policy on welfare and estimates of the reaction of welfare to macroshocks of various types.

Wolf attempted a large study of the issue at the macro level and offered some preliminary observations. They show that a scientific answer to a politically significant question is possible and may be more or less accurate, but is unlikely to be entirely useful for politicians. Wolf’s article is entitled in a very leftist spirit: “Is there really an inflation tax? Not for the middle class and the super rich.” However, his findings are unusual.

Most papers on the topic examine the impact of inflation on either income or wealth: Wolf’s idea is to link these concepts in a long-term assessment of the dynamics of net wealth. Inflation reduces any nominal income, but in different income groups its growth can increase or decrease the dynamics of the real value of household assets: a particular level of inflation can, in the medium term and in general, either increase or decrease real welfare. On the one hand, the author’s research shows: in total for the middle class (third income quintile), the effect of inflation observed in the United States in 1983–2019 was positive and maximum, for the top two quintiles it was positive, but less than for average, for the two lower quintiles – strictly negative. Not only that, but politically the middle class and the rich should, according to the authors’ calculations (and this is counterintuitive), insist on higher levels of inflation – the effect, Wolf suggests, would be stronger if US inflation were much higher than what is recorded in period studied.

But the poor might also need to vote for higher inflation. As the author demonstrates, the “inflation tax,” ultimately falling on the poor, helps reduce racial and ethnic (and apparently gender) wealth inequality. This effect, Wolff calmly states, would also be stronger with higher inflation. Higher inflation raises both average and median levels of wealth growth—the latter most strongly. Note that if the conclusion of economists regarding inflation and welfare does not change, for left-wing political programs the question of whether it is better to have fewer rich or fewer poor will sparkle with non-Marxist colors: after all, the fight against poverty and inequality has been standard among economists since the 19th century same.

Dmitry Butrin