Is inflation really bad for most people?

[Cicada]

In 2021 inflation was 6% but I read that median household income increased 9%. Yes median wages and salaries probably only rose 5% but more people had jobs, and part time work declined compared to full time work, I think. But inflation reduces the burden of debt, right? It takes fewer hours of work to pay off a fixed debt. So debtors win in inflation. 64% of Americans have mortgages. Millions more have other debts, like student loans, car loans, credit card loans, business loans etc. I never took an economics class but I can’t figure out why inflation isn’t good for most of us. Where am I going wrong?

[progree]

1. Yes, it is terrible, I lived thru the 70's, and early 80s

I don't know where you got your information on median household income. The latest I can find is for 2020 which was down 2.9% from 2019 (that's real median income, i.e. inflation-adjusted), no surprise, since it was the main pandemic year economically. The Census Bureau produces that figure in September, so we won't see the 2021 number until September 2022.
https://fred.stlouisfed.org/series/MEHOINUSA672N

And yes, you are right, wages and salaries are not keeping up with inflation, at least average earnings of private sector workers, and average earnings of production and non-supervisory workers (80% of the work force).

INFLATION ADJUSTED Weekly Earnings of Production and Non-Supervisory Workers http://data.bls.gov/timeseries/CES0500000031

Set the start year back to 1970 or even earlier. Not how it peaked in 1973, which is about when inflation started heating up beginning around the time of the many-fold oil price increases.

Median would do even less well.

Consumer Price Index: https://data.bls.gov/timeseries/CUSR0000SA0

Our experience in the high inflation years of the 70's and early 80's was that wages/salaries didn't keep up with the cost of living.

Yes, its a good deal for debtors with previous debt IF their interest rate is FIXED. If they have adjustable rate mortgages and equity line of credits, its baaddd. Credit card interest rates went through the roof (think poor people).

Back to fixed rate mortgages - yes, it was nice having the mortgage payment be flat. But the mortgage payment was about 1/3 of my house expense starting out. The other 2/3 -- property taxes, utilities, insurance, maintenance, home owner association dues -- was going up up up.

Because of soaring house prices, most young people were stuck renting -- with rental rates soaring.

Interest rates will rise with inflation if it persists, already mortgage rates are going up. When I bought my house in 1980, I was very lucky to assume a mortgage for 9% and the rest of the financing was a 12% contract for deed that had to be paid off in 3 years.

The purchasing power of savings and investments eroded dramatically during those years. Tough on old people who saw their nest eggs dwindle in purchasing power. Tough on young people and middle-aged people too saving up for a down-payment for a house or car (both of course rapidly rising in price) or college expenses for their kids.

[Cicada]

4. Inflation adjusted Median household income is up in 2021

Look at the blue line for 2021. That is median household income adjusted for inflation. It has risen in 2021. https://seekingalpha.com/article/4478222-median-household-income-november-2021

And in the December job report from the Dept of Labor there was a good jump in wages, more than inflation. Before December I had read that median wage and salary, for one worker, not a household, was up 4.8% while inflation was 6%. So I guess full year will be 5% wage hikes compared to 6% inflation. How much do we spend? Assume after tax income for one person is $100,000. Do we spend $95,000? Ok spending is up $5700. Wages rose $5000. The one person is down $700. But if he has a mortgage of $100,000 then the inflation adjusted debt has been reduced by inflation to about $95,000. Cash flow down $700 but “real” debt, debt adjusted for inflation is down $5000. That person has won from inflation. He is $4300 better off at the end of the year. I remember inflation in the bad old days. I had a CFO client who paid $30 million dollars estimated tax payment when we told him to pay $3 million. I called him and he said “Oh, did I make a mistake? Let me get this right. The IRS (under the law then in effect) has to pay me 27 million plus 13% annual interest on the 27 million, right? “ inflation had declined substantially in the previous year but the IRS, the safest payer in the world being the US government, had to pay interest on tax overpayments based on federal interest rates of the previous year. Something like 13% as I recall. The CFO was smarter than I was.

[progree]

7. OK you got me on the median household income up in 2021 vs. 2020 - thanks to many more

Last edited Mon Jan 10, 2022, 06:28 AM - Edit history (3)

people working in 2021 on average than 2020. And creating money out of thin air to buy $1.4 trillion/year of bonds to artificially suppress interest rates. Which stimulates the stock market and corporate profits (their debt is cheaper to finance), and thus more income from dividends and capital gains.

And stimulus financed with $3 trillion deficits that we and future generations will be paying interest on forever.

Yeah yeah, inflation will make a given dollar of debt less burdensome. But interest rates will rise along with inflation -- from what I've read, there is a consensus that using inflation to try to cure a national debt problem doesn't work

"And in the December job report from the Dept of Labor there was a good jump in wages, more than inflation."

How do you know what the December inflation number is?

Real average hourly earnings of production and non-supervisory workers http://data.bls.gov/timeseries/CES0500000032
was down 1.5% from November 2020 to November 2021.

As for the change in nominal earnings from this November to December (since we don't have the inflation-adjusted numbers yet from the BLS because we don't have the December CPI number yet), http://data.bls.gov/timeseries/CES0500000008 it was +0.68% (8.5% annualized)

Compare to the CPI: From October to November (the latest 2 months with data available): +0.78% (9.8% annualized)
https://data.bls.gov/timeseries/CUSR0000SA0

I gotta tell you, I know of nobody who lived during that time that wanted to go back to it. Wages were lagging far behind inflation (set the start time to 1970 or before) -- http://data.bls.gov/timeseries/CES0500000032

And I haven't heard of many people in high inflation countries doing well -- other than some clever rich people. Certainly not the majority of the people.

And the renters are not exactly the rich bankers.

[unblock]

2. Inflation is complicated in practice.

In theory, it's pretty straightforward.

Those with fixed debt, such as many homeowners, win because it's easier to pay off the fixed dollar debt.

And of course, those who own the debt lose. This means the bank, but also investors in debt, which includes many seniors, and people on fixed incomes. Again, many seniors.

Everything that's not currency rises with inflation, so homeowners win again as the value of their house goes up in decreasingly valuable dollars.

That's the simplistic theory.

Where it gets complicated is that inflation isn't uniformly distributed across the economy and over time.

Meaning, your grocery and gas bill goes up immediately, but your wage or salary might not go up for a year (or maybe quite a bit longer)

And while many homeowners have fixed rate mortgages, many also have variable rate mortgages. So when interest rates go up to combat inflation, their monthly mortgage payment will go up as well. Their house may be going up in dollar terms, but they can't easily tap that to pay the higher monthly mortgage bill.

And then there's other complications like the amount of inflation in one industry or region might not be the same as in others, so your overall expenses might be going up faster than your income, and your situation might be different from someone else's.

Then there are annoying tax effects due to fixed dollar amounts in the tax code, which effectively means many people pay a bit more in taxes. Again, these thresholds and brackets get adjusted, but usually there's a big time lag.


So, yeah, some people gain, particularly homeowners who don't have a variable rate mortgage, and who have enough resources to pay higher grocery bills and so on. But many other people have problems making ends meet and losing the value in their retirement savings.

[Cicada]

6. During the year 2021, no lag, median household income rose more than 9%, inflation plus 3

I didn’t say no one loses in inflation. But 64% of us have mortgages, few of them variable. I have a seven year zero percent Toyota car loan. I know a lot of people with student loans. How many regular people have very much money in investor securities? Maybe 4% of my retirement account is in lenders? Average people owe maybe 50 times as much as is owed to them, right? If you have a $100,000 fixed rate mortgage your “real” debt declined $6000. That’s a much bigger gain than the excess of spending over income. You haven’t persuaded me that for most of us, not all but most of us, inflation is a winner.

[progree]

9. ...

"I have a seven year zero percent Toyota car loan. "

You know that 0% financing is a sales gimmick. You would have gotten a lower price if you had paid cash.

"How many regular people have very much money in investor securities? Maybe 4% of my retirement account is in "lenders?

At my age, 40% of my savings/investments are in fixed income securities, as is commonly recommended.

[Cicada]

15. Progee 64% of Americans have a mortgage

There are millions more with other loans.

Those who should have 40% in fixed rate mortgages are old enough to be a small percentage of the population. And I doubt very many people who should have 40% have much invested that way.
Whether I could have gotten a lower car price is irrelevant. Like millions I have a zero percent car loan. I win from inflation based on that no matter why I got it.

Your comments do not refute my hunch that most of us benefit from inflation. I never said all of us, including you, do.

[progree]

26. Simulation: The mortgage holders and other fixed rate debt holders benefit in the short run,

Last edited Wed Jan 12, 2022, 11:30 PM - Edit history (1)

but not in the long run, unless incomes actually keep up with inflation which in the 70's and 80's they didn't.

Looking at real (meaning inflation-adjusted) wages of production and non-supervisory workers, they peaked in 1973, just as inflation was heating up. http://data.bls.gov/timeseries/CES0500000032

"64% of Americans have mortgages and millions more with other loans."

Not sure where that statistic comes from -- I own a home and haven't had a mortgage for years. For a couple decades before that, it was rather small compared to my income.

Some of these have adjustable rate mortgages as their main mortgage. And then there are home equity loans. Google search says most home equity lines of credit (HELOC) are variable rate.

Then there is the black home ownership rate: 44%
https://fred.stlouisfed.org/series/BOAAAHORUSQ156N

And a certain percent of them have adjustable rate mortgages, some have insignificant mortgages, some have large adjustable rate home equity loans. And credit card debt whose interest rates will soar.

It's not a demographic we can afford to blow off, particularly considering the woeful polling on Hispanics lately (who, in 2020 had a 48-49% home ownership rate).

And we don't want to blow off the demographic that greatly outvotes the others and will be disproportionately hurt - seniors and near-seniors. Who will see their fixed income investments, annuities, and pensions erode in purchasing power. Equities too given the flat performance (very negative on an inflation adjusted basis) in the 1968-1982 high inflation period.

Anyway if income doesn't keep up with prices, eventually the benefit of the reduced mortgage as percent of income in the high inflation scenario becomes less and less of a help, while the fact that other expenses are rising faster than income begin to dominate and become larger than the cumulative benefit in the early years of mortgage burden reduction. As I found in my Excel spreadsheet simulations, when I set income inflation rate to less than the price inflation rate.

And while, temporarily, people with significant old fixed-rate debt will benefit, what about new people coming along that can't afford the skyrocketing mortgages and get into that first home?

There are some who think all this is a big wealth transfer from the wealthy bankers to the middle class homeowners. No, the market in interest rates moves so that interest rates on loans generally exceed the inflation rate. That's an issue for new entrants into the housing market, getting student loans, you name it.

Politically this is going to be an extremely hard sell. Inflation wasn't popular in the 1970's and 1980's and it isn't now. That disproportionately white current homeowners will benefit for awhile is a great way to lose pretty much everybody.

I'm also concerned that once the inflation-genie is out of the bottle, it is very hard to control, short of crashing the economy like Paul Volcker (a Carter appointee) did.

#########################

"I doubt very many people who should have 40% have much invested that way." (meaning in fixed income assets like bonds or bond funds).

I don't doubt it myself.

Target date funds are very popular in 401k's where they follow those asset allocation formulas.

The U.S. equity market is $53.4 Trillion 12/31/21 https://siblisresearch.com/data/us-stock-market-value/

"As of 2021, the size of the bond market (total debt outstanding) is estimated to be at ... $46 trillion for the US market, according to Securities Industry and Financial Markets Association (SIFMA). https://en.wikipedia.org/wiki/Bond_market

So they are pretty close to the same size.

And beyond bonds, there are other fixed income investments like CD's, savings accounts, annuities, that people have.

[unblock]

13. in the long-run, it's mostly a transfer of wealth from savers to borrowers

i can't readily quantify how many people benefit vs. how many people lose. i suspect there are more losers than winners in terms of the wealth transfer for the main reason that the winning mostly comes in the form of a fixed-rate mortgage, which for most people is by far their biggest investment of their life, and the losing mostly comes in the form of retirees whose fixed income and retirement savings are largely if not entirely invested in debt. i'm not sure, doubt the typical retiree has savings on a par with this typical mortgage, so i think there are more of them. but i'm not certain, i could be wrong.


that said, virtually everyone, including the long-term winners, experiences the short-term cash flow problem that expenses nearly always rise faster than income for almost everyone. the homeowner's gain is in a long-term, illiquid asset, but the rising expenses are here today. a home equity loan could solve this problem, but then of course you're borrowing some money at the current, higher rates.


in the corporate world, it creates winners and losers similarly. companies sitting on vast amounts of cash are not happy right now. but struggling companies that have been borrowing may have an easier time of it -- at least until they have to roll over their debt. such companies race to hike prices and make enough profit so they're in a position to handle it when their debt comes due and they have to refinance at a higher rate, but until then, they can make extra profit which may see them through. if they make enough extra profit, they can reduce their debt. it's a race, but if they succeed, they inflation can help them out of their debt. of course, the company raising prices contributes to inflation....


note that i'm not saying inflation is purely bad, i agree there are winners, in fact a lot of them, in the long-run at least, as long as inflation doesn't get out of hand. it's just that there are also many losers and inconveniences for everyone.

it's not like unemployment, which is more of an unmitigated problem. personally, i think the fed should generally weigh fighting unemployment more heavily than fighting inflation. but at the moment, inflation is high and unemployment is low, so having interest rates near zero does seem hard to defend....

[Cicada]

16. Median households in 2021 had 9% income gain, bigger than 6% inflation

Income is rising more than inflation for the typical household. For 2021 and especially in December, so it doesn’t seem to be petering out.

[unblock]

17. Where are you seeing that income stat?

In 2021, $67,463 was the median household income in the United States. This is down from $68,400 in 2019.

https://dqydj.com/average-median-top-household-income-percentiles/

A chart in the link shows the 2020 figure at $69,202.08, so 2021 is lower year over year as well.

Median income in any event is not a great metric for how people are coping with inflation. If a lot of lower income workers drop out of the labor market (due to a pandemic, for example) median income goes up even if no one gets a raise.

[Cicada]

18. Here is my source for income outpacing inflation

Look at the blue line for 2021. I agree with what you said about 2020. https://seekingalpha.com/article/4478222-median-household-income-november-2021

As to the poor, their wages per hour went up way more than inflation. Didn’t Biden say it rose 14%?

I may be off base using median income. I am just doing a rough back of the envelope approximation to get a guess as to whether inflation is bad for “most Americans. “

I’m sure inflation is bad overall in the long run. I just don’t see it as the most important problem for people or the end of the world as Fox News sees it. I do tax returns for hundreds of people, including a lot of poor people. I don’t see them suffering in this economy. In fact I see them doing better than before the pandemic. But that’s my unscientific feel and I might be wrong.

[unblock]

22. There's a lot of good news in the economy especially for the working poor

Unemployment has plummeted and wages at the low end are actually going up for a change. Service workers get see people again as vaccination rates improve, and part-timers can get more hours.

So yeah, the working poor are doing better and the good news for a change outweighs the inflation problem. But this is not likely to last if inflation continues for a long time. Wages historically lag inflation; the last year has been an anomaly for a number of reasons.

Foxnews dwells on inflation partly as an obvious political attack but more legitimately because their audience is heavily weighted towards seniors who are, as noted previously, more adversely affected by inflation (and generally aren't benefitting from low unemployment and wage increases).


I certainly agree that inflation should be viewed in the context of the economy as a whole. Biden should be getting tremendous credit for getting this economy booming at 6%-ish gdp, which is huge. And some inflation with huge growth is unsurprising and overall, it's better to have the huge growth despite the inflation that often comes with it.

[left-of-center2012]

3. A lot of us here are on fixed incomes

I'm 75 disabled on social security.
Every time my social security goes up my rent goes up.

So inflation increasing the price of food takes a bigger bite at what income I have left.

Maybe not so bad for other folks but for many of us it's bad

[Cicada]

5. Those getting social security and govt retirement get pay hikes equal to inflation

On Wednesday my social security deposit will be 5.7% higher, roughly. pretty close to full compensation for inflation. At least 90 million of us get govt checks increased by 100% of the cost of living increase. I didn’t say no one is hurt by inflation. I just said that as far as I can figure most of us are winners from it, not losers. Rich bankers who are owed mortgages lose big time, for instance. So I understand that there are losers too.

[Tomconroy]

8. Sustained inflation over a long period of time certainly helps

Anyone with a large mortgage at a fixed interest rate. Flexible rates like credit cards, not so much.

[MichMan]

11. If you believe that the official inflation adjustment applies exactly to your own expenses, it does

For millions of people, the official index it either lags real inflation considerably or doesn't account for ones personal expenses.

People count on a lot more than just SS to live in retirement. My bond portfolio in my IRA certainly doesn't like it.

[unblock]

14. social security adjustments both lag and underadjust for consumer inflation

the lag is that the cola adjustment is based on the inflation experienced in the last year. so you paid more first, then you get more income to adjust later. so at best there's a temporary cash flow problem.

the underadjustment comes in the way they calculate it. there are a number of reasons, one of which is the substitution adjustment. as prices for different product rise at different rates, people substitute an alternative product that has been rising at a slower rate over a product that has been rising at a higher rate. so the modern way to calculate inflation adjusts for this, giving more weight to the product that has been rising at a slower rate, which obviously lowers the end resulted calculated inflation rate.

there is certainly some merit to to making an adjustment for this. if you start substituting margarine for butter because of this and are really indifferent between the two products, then this adjustment makes sense. however, maybe you do care and see a big difference between butter and margarine, and this adjustment is punishing you for coping with the price fluctuations by effectively not reflecting the cost of switching to an inferior product due to inflation.

so in the end there is a slight underadjustment because of this. there other imperfections in the official inflation adjustments as well, largely motivated by a political desire to control government expenses without being obvious about it.

[Cicada]

20. I agree social security should use a better cola adjustment

But the adjustment gets fairly close based on my limited experience

And my point was about most of us, not just those of us getting social security

A few hours after my du post CNN published almost exactly what I said they have more details. https://www.cnn.com/2022/01/10/economy/inflation-good-bad-winners-losers-fixed-rate-debt/index.html

[Throck]

10. Median household income up 9%?

Not around my parts.

Big city jobs? Union jobs?

I was thinking about retiring and drawing social security. That's not going to happen at the current inflation rates. I may have to work past 66 and draw at the same time.

9% ?

[Cicada]

21. 9% is household income, more spouses got jobs, less part time work

Wages on an hourly basis rose about 5%, less than 6% inflation. But 6 million people who were not working got jobs. And people who only had part time work got full time jobs. I think that’s why median household income outpaced 6%.

[doc03]

12. Inflation affects retired people on a fixed income more than most. Sure we get a COLA raise

n SS, then the Medicare and insurance premiums increase. If you have a pension from your employer most
don't have a COLA increase. My father retired in 1972 he got his SS and a pension of $300 a month from his employer
and they got by pretty well. They moved to Florida in 1974 and bought a mobile home. In 1974 their HOA was
$80 a month. Six years later in 1980 they had to move back to Ohio their HOA took their entire $300 pension. In 1973 I bought a new
car for $4000. In 1977 I traded it in on similar new car that had a sticker price of $8500. Myself I did really well
because at the time our union contract had a COLA increase every quarter. In the 1980s we lost all our nice union
perks like the COLA when Reagan started breaking all the unions. I retired in 2010 with a pension but even with low
inflation the last decade it has lost about 25% in buying power.

[Cicada]

19. Several hours after my post here CNN stole my story

CNN probably didn’t steal it but they seem to share my view inflation is actually helping most people . https://www.cnn.com/2022/01/10/economy/inflation-good-bad-winners-losers-fixed-rate-debt/index.html

[Throck]

23. When you pay debt you're only funding the billionaires banks.

"That's because wages are going up, which not only empowers workers but also gives them more money to pay down debt."

My daughter's credit card debt is actually increasing as she pays more money for her weekly groceries. Her utilities are up and the bastard landlord raised the rent to cover his increases in taxes and maintenance.

[Cicada]

24. We need to reduce housing costs

Here in CA exclusionary zoning severely limits construction of new residences. That is why rent is sky high. Some zoning laws were improved permitting a bit more construction but we need to push for laws permitting much more construction of apartments, smaller lots. Not only would that lower housing costs but it would also increase economic growth. If productive workers could afford to live near productive employers economic growth would go up a lot.

As we old coots retire, and technology boosts productivity, hopefully wages for your daughter will go up. I am actually optimistic that we will see economic gains in a few years. But getting there is frustrating.

[MichMan]

25. High inflation increases housing costs

Building products, labor and energy are all more expensive along with rising interest rates