Inflation and class

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.

Comments

[Mark Wadsworth]

I don't think there is an answer. Your 5 points are all perfectly valid, but you could add:

1) Inflation in the cost of services (in this case private school fees) has been much higher than inflation for essentials (food) over the past ten years or so.

2) Everybody's personal inflation rate is wildly different anyway, the variations between the personal inflation rate of two people in the "rich" category is probably ust as big as the overall variation between meaningless averages for "Rich" and "Poor" people.

3) Inflation tends to erde value of savings. Rich people have more savings than poor people (altho' you are right, house price inflation will make this effect on the whole more favourable to rich people).

And so on.

[Tim Worstall]

1 and 4 are compensating for inflation rates, not rebutting his point that the inflation rate for the rich might be higher than that for the poor.

[Mark Wadsworth]

I thought his point was that inflation hurt the poor more. My point is that you can make all manner of perfectly reasonable assumptions as to whom it hurts more, but the combined net effect of all these little impacts is probably difficult to quantify and subject to a margin of error that would make your findings meaningless anyway.

[Maynard Handley]

"it costs as much to heat a flat in Kensington as in Hackney."
This statement may be true, but it's also wildly irrelevant.

For example, here in LA we've had a week of extremely cold weather. The wealthy, presumably, switched on their heating systems. It would, sure, have cost me no more or less to switch my heating system on to the same comfy temperature --- a cost I am unwilling to bear --- so I suffered through the cold wearing extra clothing and using extra blankets.

The same occurs, in much the same way, in summer wrt air conditioning.

This is no different from claiming that (something I guess is less of an issue in the UK) heart surgery costs the same whether you are rich or poor. Well, yes it does. As a consequence, there are a whole lot of poor people who, when they are not suffering through the cold by wearing extra blankets, are not having heart surgery they probably need.

[Fabian Tassano]

Saying that inflation hitting rich more than poor has a "relatively benign social character" is fairly tendentious anyway. Is that supposed to be a benefit in the cost-benefit analysis of inflation? Only if you support redistribution in the first place.

We're not exactly talking about the Beckhams or the McCartneys here. More like, ordinary middle class families. But perhaps implying it's okay if they're penalised has become a position which no longer requires being argued for.

[mlees]

inflation? atre you talking about rising prices or money printing?

[yaobkjnvl iruvl]

fabuvjzkt defk ekygumfo mxkscyruj mhyxjvw ukxci hvut

[vpwljntqh ihcd]

nyejpucdv bemavw jxulscivd asgwh nwop gyhaw cjiu http://www.ukqdgyh.aiqzmgnwj.com