This Inflation Doesn’t Even Help Borrowers

 A postscript to my column today:

The Neil Irwin article in the New York Times that I criticized included this sentence: “Any group of individuals might end up better or worse off in a time of elevated inflation, depending on whether they’re debtors or creditors, and whether their wages rise faster or slower than the particular goods they buy.”

It’s true that inflation can sometimes have the effect of transferring wealth from creditors to debtors. But that effect only happens to the extent the inflation is caused by demand rather than by supply. (George Selgin explains this point well in Less Than Zero, following Samuel Bailey in Money and Its Vicissitudes in Value.)

Imagine an inflation caused by an unexpected doubling of the amount of currency in circulation. In a best-case scenario, your take-home pay doubles, the price of milk doubles, airfares double, etc. The outstanding balance on your mortgage, though, stays the same. It’s fixed in nominal terms. You repay it in dollars worth half as much as they used to be. That’s a gain to you and a loss to the bank.

Then imagine an inflation caused by a natural disaster that makes all goods and services twice as difficult to produce. Airfares double, the price of milk doubles—but there’s no reason your take-home pay should double. Your mortgage payments are worth half as much as they used to be worth, so the bank still loses; but the money isn’t twice as easy to make, as in the previous scenario, so you, as the borrower, aren’t coming out ahead.

Our inflation appears to be mainly caused by supply-chain disruptions of various kinds. And that means it’s nearly pure loss.