OPINION: The 40-year high inflation rate can be a blessing in disguise for those with a high ratio of debt to assets. Here’s why.
NEW YORK —Anxiety about inflation, among citizens and politicians alike, has been peaking recently. In the United States, the year-on-year increase in consumer prices reached 7.5% in January, the highest rate since February 1982. If people’s incomes increase by less than the rate of inflation, their real incomes decline, and they cannot afford to buy as much stuff as before. This is the “income effect” of inflation.
Moreover, the higher the ratio of debt to assets, the greater the percentage increase in net worth as a result of inflation. This is the “leverage effect”: If your debt in the previous example was $40, rather than $20, then your net worth would increase by 3.3%. Wealth inequality One hallmark of U. S monetary policy since the early 1980s has been a moderation in inflation, which averaged 2.5% per year from 1983 to 2019 . Coincident with this trend has been a surge in U. S wealth inequality. To measure this, I used the ratio of the wealth of the top 1% of the wealth distribution to median wealth . From 1983 to 2019, this ratio more than doubled from an already high 131.4 to an even more staggering 273.8.
The story is similar regarding the ratio of mean net worth between Hispanic and white households. From 1983 to 2019, the actual ratio increased from 0.16 to 0.19. With zero inflation, it would have decreased to 0.14.
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