Does the rich world’s current bout of inflation have minimal costs, or even none at all? The trouble for economists is that there is a world outside their research
Save time by listening to our audio articles as you multitaskInflation is regarded as costly because it erodes people’s savings and distorts price signals. And there are unquestionably instances when it has brought an economy to its knees. During Weimar Germany’s period of hyperinflation in the 1920s people’s savings evaporated, eliminating the middle class and paving the way for the rise of fascism. Inflation also spiralled out of control in Zimbabwe under Robert Mugabe.
On the whole, though, economists see a tenuous connection between inflation and workers’ real living standards. Sometimes prices rise faster than wages; sometimes they do not. British real wages grew strongly during the inflationary era of the 1970s. According to a study published in 1975, American workers, whether unionised or not, had seen inflation-busting pay rises in the preceding decade.countries going as far back as 1990.
In a paper published in 2018, however, Emi Nakamura of the University of California, Berkeley, and colleagues examine price dispersion for the same sorts of products over time. Looking at the period of high inflation in the 1970s, they find “no evidence that prices deviated more from their optimal level” than just before the pandemic, when inflation was far lower. The “strong conclusions about [the] optimality of low inflation rates [in this regard] need to be reassessed”, they conclude.
So does the rich world’s current bout of inflation have minimal costs, or even none at all? The trouble for economists is that there is a world outside their research. Few people know or care about their results. But they know what they think about inflation: they utterly, implacably loathe it.
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