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Does inflation help minimize income inequality?

  • One can argue that it would reduce the wealth of savers (i.e. the wealthy) and pull assets out of low-risk bonds and create more demand. Putting money into treasury bonds or cash would create a guaranteed negative return rate. Savers would be motivated to spend or find higher-risk investments which seek growth. Also, people who derive more of their income from wages (i.e. the poor) would do better as wages would have to rise, especially in the face of U.S. professional population demographics.

  • Answer:

    In addition to 's description of the negative impact of inflation on income, inflation is likely to erode the poor and middle class's wealth much more than the truly rich.  Several alternative investment options can easily be pursued by the wealthy to stay ahead of inflation: Buy gold Buy Treasury Inflation Protected Securities (TIPS) Buy land Buy foreign currency denominated assets For most people, liquid assets are tied up in a bank account or 401K plan.  Those will take a hit from inflation much more compared to the rich who can explore a wide array of investment vehicles that would not be available in a standard 401k plan. There may be some middle class folks who come out ahead in the short-term from inflation because they have a 30-year mortgage locked in at 5% and the real cost of that mortgage goes down each year with inflation.  But the overall negative impacts on capital formation will be far more insidious as banks will quickly raise mortgage (and all loan) rates and everyone will pay more sooner or later. Inflation might be attractive in the short-term but it can get quickly out of hand and will destroy wealth across the board, and those at the bottom of society will feel the pinch far more than those at the top.

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Inflation does not help minimize income inequality and here is why: Inflation can be viewed as a form of tax. It eats away from a person's income and decreases their purchasing power. Wages don't adjust to inflation rapidly on a month to month basis, and if inflation is very high then wages will not keep up as wages are sticky (in the sense that they are slow to rise because of contracts etc). So let's say there is 5% inflation in the economy then the poorest will be affected the most since as mentioned before inflation is a form of tax and it is proportional (the same tax rate is applied to all workers) which is terrible. In fact one of the reasons the U.S has a high level of income inequality is because minimum wages have not kept up with inflation and the real minimum wage has declined over time.

Jayanth Muthya

Far from it! Inflation is the main way that wealth is taken from the poor and middle class and given to the rich. Here is why: Inflation benefits debtors and hurts savers. The poor are more likely to have simple investments and savings, like a simple savings account or keeping cash under the mattress. The poor are also more likely to have consumer debt. The rich are more likely to invest in sophisticated assets that outperform inflation. The rich are also more likely to leverage debt for investments, thus taking full advantage of inflation. So while grandmas $50k in a simple savings account loses 4% of its purchasing power every year, the super wealthy 1 percenter's hedge fund portfolio is doing great, and he can borrow money to invest more.

Thaddeus Vinson

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