Inflation’s Potential Problems for More Than Just the Rich

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Inflation’s Potential Problems for More Than Just the Rich

Published: Sunday, August 15th, 2021 @ 12:38 pm
By: John Locke Foundation ( More Entries )

Publisher's Note: This post appears here courtesy of the John Locke Foundation. The author of this post is Mitch Kokai.

Stan Veuger and Daniel Shoag write for Persuasion about the likely negative impact of continuing inflation.

Over the past few months, pundits and policymakers alike have expressed increasing concern about rising price levels. Sure, some of these analysts have been sounding the inflation alarm bells for over a decade. Others construct their own inflation statistics by focusing only on items that have increased in price while ignoring the prices of goods that have gotten cheaper. But this time, economists who have been otherwise comfortable with loose fiscal and monetary policy are expressing some unease. Even überdove Paul Krugman believes that "it makes more sense to worry about inflation this time around."
To be clear, when we say inflation we mean an increase in aggregate consumer prices. That is quite different from changes in relative prices. Over the past few months, there has been a series of freak-outs over specific items-lumber, Christmas garlands, used cars, and others. But even stark changes in relative prices can be useful. ... Instead, what we are interested in here is the price of the full bundle of goods and services consumers purchase.
We are in fact seeing higher inflation readings than expected even a few months ago. This may largely be the result of transitory factors like imperfections in the American Rescue Plan and supply chain adjustments, but there is significant uncertainty. And even these transitory factors can feed into expectations of future inflation. Such expectations, in turn, can be self-fulfilling if they incentivize workers and firms to raise their wage demands and prices preemptively.
It is important to be clear-eyed about the potential consequences. Ardent full-employment advocates often shrug off inflation concerns (loose fiscal and monetary policy are often seen to generate both) and highlight the advantages of an economy that is running hot. But inflation generates risks for the poor and the working class as well as for the rich.

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Inflation’s Potential Problems for More Than Just the Rich

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