Anatole Kaletsky makes a remarkable claim – that inflation, until recently, has had a “relatively benign social character…hitting the rich much harder than the poor”:
Rich people spend much more on expensive services such as private education, entertainment and health than the poor, who spend most of their money on food, clothes and other essential goods. This means that inflation tends to be higher for the rich than it is for the poor.
I’m not convinced, and nor is the academic literature. There’s
evidence here and here (pdf) that inflation is positively correlated with inequality.
And there’s evidence (pdf) here that there’s little clear link either way. I know of
no research showing a clear, systematic positive link.
Indeed, there are five ways, at least, in which inflation traditionally hurts the rich less than the poor.
1. The rich own land and houses, whose prices rise as inflation rises.
2. The rich, by definition, have more opportunities to substitute between goods. A rich man can substitute away from Savile Row towards Primark. A poor one can’t.
3. The higher your income, the smaller the cut in real incomes caused by a given price rise. If you have a net income of £1000 a month, a rise of £50 a quarter in your electricity bill cuts your disposable income by 0.83%. If your net income is £3000 a month, it cuts it by just 0.27%; it costs as much to heat a flat in Kensington as in Hackney.
4. The rich can buy insurance against general inflation; they have the savings with which to buy index-linked gilts or national savings. The poor don’t. And the rich have the bargaining power with which to protect their real wages.
5. When inflation rises, so – under inflation targeting – would real interest rates, as the central bank tries to cut inflation. Higher real rates encourage firms to cut spending. And they are more likely to shed unskilled labour than skilled labour. So the poor suffer.
Overall, then, there's little reason to suppose that inflation reduces inequality.