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Why Americans hate inflation

I think that policy debates among elites have a tendency to get going before there's really broad awareness of what the two sides are talking about, so kudos to James Surowiecki for offering a clear explanation of why it is that some economists would like to see more inflation in the economy:

Right now, the U.S. economy has two fundamental, and interconnected, problems. First, consumers face huge debt left over from the borrowing spree of the past decade. Second, the dominant sentiment is caution — consumers are hesitant to spend, and businesses are hesitant to expand, invest, and hire. If the Fed were to moderately raise its inflation target — currently around two percent — and commit itself to keeping prices moving higher for the next couple of years, it could help change this dynamic. If people believe that prices are going to rise in the future, they may be less cautious about spending in the present, since money that isn’t put to work will lose value. And, because inflation erodes the real value of debts, people’s debt burdens would shrink.

He also does a good job explaining why people hate inflation so much -- even though that hatred isn't really rational.

In polls, voters regularly cite high prices as one of their biggest concerns, even when inflation is low. A 2001 study that looked at the “macroeconomics of happiness” found that higher inflation put a severe dent in how happy people reported themselves to be. The distaste for inflation is such that a 1996 study (titled, aptly, “Why Do People Dislike Inflation?”), by Yale economist Robert Shiller, found that, in countries around the world, sizable majorities said that they would prefer low inflation and high unemployment to high inflation and low unemployment, even if that meant that millions of extra people would go without work.[...]

People believe higher prices reduce their standard of living and make them “poorer.” This is obviously true for people living on fixed incomes or off their savings, but for everyone else, as many studies have shown, inflation translates into higher incomes as well as higher prices, and it typically doesn’t have much of an effect either way on people’s standard of living. (After all, we’ve had sixty years of inflation in the postwar era, yet we’re much more prosperous than we were in 1950.) That’s not how it feels, though: Myopia leads us to focus on how much more we have to pay, rather than on how much more we earn. Inflation also sets off other alarm bells. It often increases uncertainty, which most people are averse to, and, because it can be described as “weakening” a country’s currency, it affects morale.

I'd just add that people tend to remember problems they had previously. For a long time, inflation was a problem -- and a hard one to deal with. They remember that. The idea that it's no longer a problem, and might even be part of the solution, is counterintuitive, and largely unknown. Incidentally, we may be on the verge of a similar issue with financial risk, where a period in which too much risk hurt the economy will now be followed by a period in which too little risk hurts the economy.

By Ezra Klein  | September 22, 2010; 3:45 PM ET
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Following up on your point, I have to wonder if people who were born after 1980 or so are less likely to care about inflation than the general public (after adjusting for the relative liberalness of that demographic to begin with). They presumably still have the same cognitive biases behind finding increasing prices annoying, but they've (well, we've) grown up in fairly low inflation so they don't have the bogeyman of the 1970s haunting them.

Posted by: usergoogol | September 22, 2010 4:05 PM | Report abuse

"sizable majorities said that they would prefer low inflation and high unemployment to high inflation and low unemployment"

This assumes that there is in fact a trade-off between inflation and unemployment and that the policy makers in the government have a sophisiticated enough understanding of how the economy works that they can successfully execute this.

The other alternative is that we will in fact get both at the same time if we try to use inflation to counteract unemployment, aka stagflation and the misery index.

Posted by: jnc4p | September 22, 2010 4:09 PM | Report abuse

Surowiecki's piece is pretty meagre on specifics. He wants the Fed increase it's inflation target. Like inflation will magically follow just because the Fed increases it's target? What else is the Fed supposed to do?

Posted by: bgmma50 | September 22, 2010 4:09 PM | Report abuse

They didn't ask the right question. It shouldn't be "do you prefer low inflation and high unemployment" people naturally assume they won't be the ones unemployed.
Let us presume that in our low inflation environment unemployment is 5% higher than it would be under high inflation. The correct question then becomes: "Would you prefer low inflation and 5% lower income, or high inflation and the same income."

The unemployment is because wages are too high. In the same way government spending eventually leads to higher taxes even if they can be delayed. High unemployment eventually leads to lower wages, even if the wage cuts don't show up immediately.

Posted by: zosima | September 22, 2010 4:18 PM | Report abuse

No surprise that people "hate inflation." If income growth lags inflation, people lose real purchasing power before their incomes increase to reach the same level of purchasing power before prices rose. Making the assumption that income growth will always at least match inflation (which the past 20 years has shown isn't always the case for wage earners in the US).

Posted by: tuber | September 22, 2010 4:21 PM | Report abuse

I've heard it said that people dislike inflation more than unemployment, and I thinbk the reason is that virtually everyonbe experienced inflation in terms of rising prices but everyone doesn't lose their job. I remember the inflation of the '70s very well. For most people I doubt wages and salaries kept pace, alhough wages may have caught up some later. It's true it hits people on fixed incomes the most, but many employed peopole in effect have fixed incomes because they didn't get raises.

Unemployment isn't because wages are too high. It is because employers would prefer to sit on their cash because they feel the demand isn't there. The demand isn't there because of unemployment and loss of wealth in housing and stocks. It is a vicious circle. Demand is never going to go up until people have more money--it's that simple. That's why the tax cut debate is so stupid. Hign income people don't spend as much so their tax cuts won't generate as much demand. It just lets them dfeel better than everyone else.

Posted by: Mimikatz | September 22, 2010 4:33 PM | Report abuse

People know intuitively that high inflation is bad for them because increases in their incomes seems to them to lag increases in prices. It may be true for most people, too. A modest increase in inflation can, however, be helpful over time. For example, homeowners with fixed-rate mortgages see their housing expenses gradually decline as a percentage of their income--a phenomenon that anyone who has been "house poor" understands. (And we appear to have plenty of "house poor" people, who would use rising incomes to spend on things that actually employ people.)

Posted by: pjro | September 22, 2010 4:34 PM | Report abuse

Businesses are sitting on cash right now too. Would a policy of slightly higher inflation encourage businesses to put the money to work too?

Posted by: ideallydc | September 22, 2010 4:40 PM | Report abuse

According to a Northeastern University study, the unemployment rate for households above $150,000 was 3%, for $100-150K it was 4% and for those under $12,500 it was 31%.

The idea of increasing inflation is to potentially reduce the value of assets held by better-off people in order to help lower-income people get jobs.

No, I have no idea why this isn't a surefire winner either. It's a mystery!

Posted by: robbins2 | September 22, 2010 5:01 PM | Report abuse

Inflation is too much money chasing too few goods. Granted the Fed is pumping the system with money, but capacity utilization is still at the 70% level or so, which is pretty much the low since we have been keeping records.

Can the act of printing money create a situation where increasing prices drive increasing wages, which lowers the relative economic importance of consumer debt? In a "normal" economic environment, it is conceivable. This is not a normal environment, it is in the aftermath of an asset bubble. I don't believe the Fed could create inflation right now even if it wanted to. With so much excess capacity (both capital and labor) higher prices will not (IMO) drive wage increases, so all you end up doing is reducing disposable incomes even further and depressing the economy.

We had a name for this in the late 70s - the misery index (interest rates + inflation + the unemployment rate) If you pump the rates and don't affect unemployment, you drive the index through the roof.

I believe trying to create inflation in this environment will do nothing except make a bunch of commodity trading fund managers very rich, help commodity exporting nations, and sucker-punch the middle class.

Posted by: sold2u | September 22, 2010 5:05 PM | Report abuse

Also, when inflation comes up in school, it comes up in the form of 70's stagflation, and more prominently, the hyperinflation experienced by Germany in the 20's. Going along with your article, people talk about how you could buy a cup of coffee for a dime when they were kids, or how their parent's first car cost only $2000, and there's just the assumed fact in these conversations that it is a BAD thing that things cost more now. I think it's really beat into us that inflation=bad.

Posted by: zperez | September 22, 2010 5:25 PM | Report abuse

So, for asset-less hand-to-mouthers, inflation is a nullity (wages and prices rise together) but for self-sufficient free-and-clear asset-holders, inflation eats away at the financial freedom they have worked to build for themselves.

As robbins2 notes above "No, I have no idea why this [inflation] isn't a surefire winner either. It's a mystery!"

sold2u notes the presence of "much excess capacity" which I also believe is a factor; in fact, there may be a quasi-permanent (and growing) glut of deliberately idle human capacity. Marx explored this sort of glut both in his economic and philosophical writings: as he noted, some economic models ultimately fail without an individual mandate to work for whatever wage provided.

Posted by: rmgregory | September 22, 2010 5:54 PM | Report abuse

Too many folks see "inflation" as what happened in Germany during the Depression. Yes, that was inflation, but it was compounded by economic collapse and punitive Versailles Treaty policies.

If we want to get our real estate sector above water more quickly, an inflation target of maybe 4% instead of 2% will help. It will also drive markets up in dollar terms, and make American exports more competitive (while making imports more expensive).

Lenders hate inflation, as it reduces the actual value of what they are owed, while debtors prefer inflation for the revenue increases it provides that reduce the relative value of their debts. We had this identical argument over Silver Coinage a century ago.

I think the American economy can well afford a period of higher inflation, so long as it is temporary, and closely managed by the Fed.

Posted by: OldUncleTom | September 22, 2010 5:58 PM | Report abuse

"So, for asset-less hand-to-mouthers, inflation is a nullity (wages and prices rise together) "

In China perhaps but not if you live in the US.

Posted by: tuber | September 22, 2010 6:35 PM | Report abuse

My concern is with overshooting and the subsequent unwind.

Despite a 2% inflation target, we managed to see CPI inflation over 5% in 2008. The same overshoot on a 4% target would be 7%. Moreover, higher inflation is also more volatile inflation. Finally, have we had a significant slowdown in inflation in recent memory unrelated to a recession? What good does it do to use inflation to spur a recovery to 6% unemployment in 2 years, if the Fed, in the process of fighting this inflation, puts unemployment back up to 8% the following year?

Are the banks prepared to handle the interest rate surge which would accompany a 4% inflation target? There are a lot of low interest rate loans out there, which would in many cases be below bank note and CD yields in a high inflation environment.

What if we start to inflate yet another bubble (or reinflate an old one)?

What if, like the 1970s, we have a bad estimate of the output gap and our reflation efforts result in stagflation?

Also, consider inflation and wages. Prices go up all throughout the year, though you don't get a raise until the start of the next. Inflation benefits those who get the money first. Everyone else merely catches up at the end of the game.

Posted by: justin84 | September 22, 2010 7:31 PM | Report abuse

I was alive when the US had double digit inflation. OK so I was a student and lived in a dorm and it wasn't my problem, but I never understood why people hated inflation so much. It is very clear that people thought the alternative was lower prices and just as high wages.

Looking back and looking at data, the US attitude isn't so strange. It just so happens that median real wages stopped growing during the period of high inflation.

This appears to be mostly a coincidence, since They didn't start growing again until the 90s then median real wage growth slowed again in the 00s even with low inflation. But it only appears to be a coincidence to someone who looks at time series stretching over decades.

People will believe that inflation implies low real wage growth, if the two are strongly correlated in their experience.

I don't think that inflation was ever a serious economic problem in the USA. I didn't think so then and I still don't think so.

Posted by: rjw88 | September 22, 2010 8:12 PM | Report abuse

No surprise EK and friends live in a world of steady advances in income that readily beat inflation.

Surprise! Most people do not. My take home pay has barely changed in 5 years and I have had my wages frozen for the last two years.

More BS from the designated mouth piece.


Posted by: davidring | September 22, 2010 8:35 PM | Report abuse

We were just getting started in our careers during the inflationary period of the late 70's-early eighties. We couldn't keep up with the costs. Our salaries weren't going up, but prices did weekly. We had friends who took out ridiculous mortgages with huge balloon payments due in five years because the interest rates on the standard 30 year fixed rate loans were 12-15%. I remember looking at stereo systems with DH, and we bought one on the spot because it was going to cost more at the end of the month. There was no point in saving, because prices went up faster than any earnings you could make on your savings. It wasn't a great way to live and I still curse the name of Jimmy Carter (superior as he think himself). I wouldn't wish inflationary times on anyone.

If the policy wonks think that they can "control" inflation, they are nuts. We live in a global economy now, and the US economy is just a piece of the puzzle.

Posted by: Beagle1 | September 22, 2010 8:37 PM | Report abuse


I agree the Fed can't create inflation with conventional monetary policy. A lot of the pundits, like Klein and Yglesias, who seem to think that the Fed can just wave a magic wand to create inflation are, at best, engaging in wishful thinking.

But the Fed could probably create inflation with unconventional policy. If they started paying people to build bridges with printed money or just stopped issuing treasuries to finance debt and started paying government payroll through seigniorage, I think they'd get inflation. Buying long term assets, like 30 year treasuries, might also work.

Of course, there are questions about whether this is legal. I forget the exact text, but paraphrasing, the Fed is only able to take extraordinary or unconventional measures if the economy is in serious crisis. Whether an underperforming economy and a failure of the Fed to meet their mandate for minimizing unemployment qualifies as serious enough is not entirely clear.

That said, I doubt the Obama administration would stop them if they tried.

Posted by: zosima | September 22, 2010 10:29 PM | Report abuse

"So, for asset-less hand-to-mouthers, inflation is a nullity (wages and prices rise together) but for self-sufficient free-and-clear asset-holders, inflation eats away at the financial freedom they have worked to build for themselves." posted by rmgregory

Actually, I believe that the opposite is true. Inflation benefits the free-and-clear asset-holder, even more so the leveraged asset-holder. It destroys the asset-less hand to mouther. His/her wages don't keep up with rising prices, rising interest rates, and rising cost of living.

Posted by: bgmma50 | September 22, 2010 11:45 PM | Report abuse

Local Companies are Recruiting for the Fall Season

Posted by: frankle23 | September 23, 2010 6:02 AM | Report abuse

A good time to love inflation is when you have a large mortgage with a low fixed rate of interest. good old inflation will tend to jack up your property value along with your income level, perhaps with a lag, so in real terms you probably will be no worse off there, but your monthly mortgage payments remain fixed at the pre inflation payment amount, effectively reducing the real cost of your mortgage since you will be paying off the mortgage with inflated dollars. Is this the light at the end of the tunnel on the current property market?

Posted by: jfgerald | September 23, 2010 8:11 AM | Report abuse

I remember reading Mark Singer's "Funny Money" about the Penn Square Bank failure back in the '80s when it was serialized in the New Yorker. Besides being a good exposition of the whole oil/money game that went on in OK and TX, it made a very good case for a low level (2-3%) inflation, and how that actually worked to the benefit of workers with mortgages, just at jfgerald has stated above. It's the big money holders who don't like inflation -- their wealth gets smaller all the time.

Posted by: jshafham | September 23, 2010 10:32 AM | Report abuse

"A good time to love inflation is when you have a large mortgage with a low fixed rate of interest. good old inflation will tend to jack up your property value along with your income level, perhaps with a lag, so in real terms you probably will be no worse off there, but your monthly mortgage payments remain fixed at the pre inflation payment amount, effectively reducing the real cost of your mortgage since you will be paying off the mortgage with inflated dollars. Is this the light at the end of the tunnel on the current property market?"

It's the train coming at them for those who would like to buy but are still priced out of the market thanks to polices that prop up housing prices at the cost of all else.


Posted by: davidring | September 23, 2010 10:37 PM | Report abuse

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