Wealth Transfers from Inflation

In a speech after the recent New Hampshire primary, Rep. Ron Paul offered the opinion that inflation transfers wealth from the poor to the rich. I disagree.

Let’s begin by setting the stage more precisely. We are talking about an increase in the rate of inflation that is unanticipated. In the credit market, an increase in unanticipated inflation transfers wealth from creditors to debtors. If creditors are more likely to be rich and debtors are more likely to be poor, then unanticipated inflation transfers wealth from the rich to the poor. This is one way to characterize the political parties. The Republicans represent creditors and the Democrats represent debtors. As a result, the Democrats are more interested in inflationary policies and Republicans are more interested in price stability. Of course, there are other ways to slice the two parties’ interests.

In every sphere in which there are contracts, unanticipated inflation disrupts those contracts. So in labor markets, unanticipated inflation injures wage earners and helps employers. In real estate markets, unanticipated inflation injures landlords and favors tenants. In business to business contracts, unanticipated inflation advantages buyers and disadvantages sellers.

I suspect that, on the whole, the poor are helped and the rich hurt by unanticipated inflation. Of course, this is contrary to the view expressed by Rep. Paul.