What are the social costs of inflation

Inflationary effects

Consequences of an unsteady and unpredictable inflation trend for employment (Phillips curve), distribution (redistribution effects) and growth and welfare (allocation effects). According to the Friedman-Phelps hypothesis, temporary positive employment effects of unforeseen inflation or acceleration in inflation only last as long as the expected or anticipated inflation rate falls short of the actual inflation rate. The short-term trade-off disappears in the inflationary equilibrium, which is characterized by a long-term vertical Phillips curve at the level of the natural unemployment rate. If the inflation rate is overestimated during the recession, the Phillips curve can temporarily even slope positively (stagflation). Redistribution effects consist of the effects of unexpected or unanticipated inflation on the real distribution of income and wealth. They are unilaterally at the expense of all those sections of the population who are unable to fully anticipate inflation in the intensified distribution war caused by inflation (pensioner hypothesis, wage lag hypothesis, creditor-debtor hypothesis). A quantification fails, however, because in an inflationary economy with rising goods and factor prices, the nominal income streams and wealth stocks also increase at the same time. In addition, each and every one of their income and expenses is affected by inflation in several ways. Inflation-related redistributions of real income and real assets could only be avoided if there was an even anticipation of inflation, such as that which could be achieved through comprehensive indexing of all nominal contracts. Allocation effects occur even in the inflationary equilibrium with full inflation anticipation. These go hand in hand with overall economic growth and welfare losses caused by the misallocation of resources, flight to real assets and avoidance of the inflation tax. They are also referred to as the social costs of inflation because they cannot be compensated for by any other kind of advantage, i.e. they represent so-called deadweight losses. Literature: Fischer, S./Modigliani, F., Towards an Understanding of the Real Effects and Costs of Inflation, in: Weltwirtschaftliches Archiv, 114th year. (1978), p. 810 ff. Kösters, W, Allokations- und Distributionseffekte der Inflation, in: wisu, 6th year (1977), p. 13ff. Streissler, E. et al., On the relativization of the goal of monetary stability, Göttingen 1976.

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