A recent survey discovered that many Americans are concerned about the increasing cost of living. Even though the average family’s wealth has grown by 37% from 2019 to 2022, only 14% of people feel they’re financially better off since the last presidential election.
Researcher Edward Wolff explored how inflation, the rise in prices, impacts wealth. He found that inflation affects individuals differently based on what they own, i.e. tangible assets.
Wolff introduced the concept of “net inflation gain,” measuring how inflation influences what you own and owe. When inflation occurs, the value of the dollar decreases. This means items like salaries and savings might be worth less, but assets like houses and businesses could be worth more.
Wolff’s study indicates that those with limited wealth don’t really benefit from inflation. However, the middle class may gain something. The very wealthy (top 1%) also benefit because they own numerous assets.
The study suggests that the middle class benefits because their possessions become more valuable with inflation, and their debts become less significant. However, those who are slightly wealthier (80th to 99th percentiles) are negatively affected because they have less debt.
The study underscores the importance of owning things to safeguard against inflation. For those with lower incomes, building wealth through ownership, such as houses, is crucial. The housing market, especially for first-time homebuyers, is seen as a wise investment to guard against inflation.
Additionally, the study warns against using inflation to fund government spending, as it can disrupt markets, impact contracts, and devalue savings. This disproportionately affects the poorest Americans, resembling a hidden tax on those who can least afford it.
Understanding the relationship between inflation and wealth is crucial. While some people benefit, others are negatively impacted. This emphasizes the importance of building wealth through ownership and being cautious about how inflation affects different income groups.
This does beg the question at what point with a shrinking middle class and increasing number of impoverished, does the system become unstable? The US Debt is continuing to climb and the number of individuals entering the workforce compared to those retiring is a net negative, so inflation seems the only path forward to service that debt. How does the US economy endure in such an environment?
