Is There Really an Inflation Tax? Not for the Middle Class and the Ultrawealthy

Working Paper: NBER ID: w31775

Authors: Edward N. Wolff

Abstract: One hallmark of U.S. monetary policy since the early 1980s has been moderation in inflation (at least, until recently). How has this affected household well-being? The paper first develops a new model to address this issue. The inflation tax on income is defined as the difference between the nominal and real growth in income. This term is always negative (as long as inflation is positive). The inflation gain on household wealth is the revaluation resulting from asset price changes directly linked to inflation. This term can be positive or negative. The net inflation gain is the difference between the two, which can also be positive or negative. The empirical analysis covers years 1983 to 2019 on the basis of the Federal Reserve Board’s Survey of Consumer Finances (SCF) and historical inflation rates. It also looks at the sensitivity of the results to alternative inflation rates, and considers the effects of inflation on real wealth growth, wealth inequality, and the racial wealth gap. The results show that inflation boosted the real income of the middle wealth quintile by a staggering two thirds. In contrast, the bottom two wealth quintiles got clobbered by inflation, losing almost half of their real income. Inflation also boosted mean and especially median real wealth growth, reduced wealth inequality, and lowered the racial and ethnic wealth gap. Both the income and wealth results are magnified at higher (simulated) rates of inflation.

Keywords: inflation; wealth inequality; household well-being; racial wealth gap

JEL Codes: D31; H31; J15

Causal Claims

Cause	Effect
inflation (E31)	decrease in real income (E25)
inflation (E31)	increase in household wealth (G59)
inflation (E31)	net worth improvement for middle class (D31)
inflation (E31)	reduction in wealth inequality (D31)
inflation (E31)	decrease in racial wealth gap (I24)