THE FINANCIAL PAGE
James Surowiecki
1 People really, really hate inflation. In polls, voters regularly cite high prices, as one of their biggest concerns, even when inflation is low. A 2001 study that looked at the “macroeconomics of happiness” found that higher inflation put a severe dent in how happy people reported themselves to be. The distaste for inflation is such that a 1996 study (titled, aptly, ‘Why Do People Dislike Inflation?”), by the Yale economist Robert Shiller, found that, in countries around the world, sizable majorities said that they would prefer low inflation and high unemployment to high inflation and low unemployment, even if that meant that millions of extra people would go without work.
2 Weimar-style hyperinflation is, of course, an awful thing. But people loathe inflation even in moderate doses, where the evidence suggests it does little damage. The best estimates of the cost of inflation find that even a ten-per-cent inflation rate – much higher than anyone is currently pushing for – shrinks consumption by just 0.1 to 0.8 per cent. There are other costs, to be sure: inflation shrinks the value of people’s savings, and uncertainty about future prices makes business decisions less efficient. There’s also the risk of inflation getting out of control. But the historical record suggests that the risk of three-percent inflation turning into hyperinflation is very small.
3 So why is inflation unpopular? The biggest reason, Shiller found, was simply that people believe higher prices reduce their standard of living and make them “poorer.” This is obviously true for people living on fixed incomes or off their savings, but for everyone else, as many studies have shown, inflation translates into higher incomes as well as higher prices, and it typically doesn’t have much of an effect either way on people’s standard of living. (After all, we’ve had sixty years of inflation in the postwar era, yet we’re much more prosperous than we were in 1950.) That’s not how it feels, though: myopia leads us to focus on how much more we have to pay, rather than on how much more we earn. Inflation also sets off other alarm bells. It often increases uncertainty, which most people are averse to, and, because it can be described as “weakening” a country’s currency, it affects morale. Shiller found that people associated rising inflation with dwindling social cohesion. There’s also a moral dimension: we connect inflation to a lack of discipline and failure to live within our means. The
most striking thing about Shiller’s study was that no one surveyed mentioned any possible benefits of inflation, even though to Americans currently besieged by debts it would be a lifesaver. The New Yorker, September 27, 2010.
With respect to moderate inflation, which of the following is most supported by the information in the article?
a) Even moderate inflation reduces the people’s standard of living and destroys their ability to consume.
b) In general, moderate inflation really doesn’t make a significant material difference in people’s lives.
c) The great prosperity of the United States is the result of a sixty-year period of moderate inflation.
d) Moderate inflation is a necessary condition if wages are to rise.
e) The nature of even moderate inflation is that it always rises faster than wages.