Is there any positive benefits to inflation?

[Bootes Void]

Inflation especially past 2.5%-3%  yoy growth is considered to be bad and harmful(along with deflation on as well) but is there any positive benefits to inflation ?

- may make personal debt cheaper in terms of real money
- may deal with overcharged coats(labour and goods) in the economy so inflation may even it out to a reasonable level
- could encourage innovation to make goods and services cheaper and more efficient in the medium to long run( though the effect of this is unclear)

[Antonio the Sixth]

A 3-5% inflation, like we used to have in the golden postwar decades, is almost certainly preferable to the stagnant 1-2% morass we have now. I suspect that the main reason inflation has been so low these past decades is because wage growth is almost nonexistent. Back in the day it was no big deal if prices rose by 4% if your wage rose by 8% at the same time. Low inflation tends to benefits rentiers, as they don't need to invest their money in anything socially useful in order to reap a profit, and forces indebted people into further misery.

[Clarko95 📚💰📈]

Following the above, inflation stimulates consumer spending and business investment, and reduces real interest rates (they are already basically negative or zero), which incentivizes borrowing and lending, and reduces current debt burdens.

We've seen an incredibly strong recovery in employment in the current economic recovery, faster than almost every recession in the post-WWII era. This is something that people seem to be missing about the current burst of inflation: we do indeed have higher inflation, yet, but jobs, economic growth, consumer spending, and business investment are all booming. This is much better than the prolonged low-inflation, high-unemployment trends that we saw over the last three recessions. Even during the high inflation of the 1970s, we saw very strong employment growth outside of recessionary periods.

Unfortunately real wages are declining, but the flip side of that is we are likely to see very strong hiring continue for the next year.

What I am hoping for is that we can finally break out of our virtually-zero interest rate pattern of the past 20 years, and can finally begin raising interest rates back to normal levels to stop constantly creating asset bubbles as a way of papering over low investment & wages.

[jaichind]

Some inflation does allow enterprises to adjust the compensation of people in their organization that is overpaid but still valuable.  In an era of medium-level inflation, you can set the compensation to some positive level below the rate of inflation for overpaid people and not have to explicitly cut their compensation.  People are much more averse to losses than missing out on gains so a -1% change in compensation is way way worse than a 1% increase while the difference between 9% and 7% is not that much in the psychology of most people.   One "benefit" of the 1970s inflation surge was that corporate America was able to make radical adjustments of compensation in line with the productivity of their employees.

A personal example. I am way overpaid for the work I do.  I have been overpaid, I would say, since 2012.  As a result, I have been always been negative about inflation because I know my management if they knew what they are doing, would start to set my compensation increase to a level below a significant level of inflation.  I think they caught on to me being overpaid by around 2017 and have started to set my compensation to below the rate of inflation but the low rate of inflation meant they were a limit to this since I am still fairly valuable to my company so they have to produce a positive competition increase for me for fear of angering me.   Now inflation is surging upward I expect my own compensation increase to stay at 1%-2% a year which would slowly adjust my compensation to converge to my true market value.  The good thing for me is that my income these days is much more dominated by investment income relative to earned income when compared to 10-15 years ago so I pretty much do not care.  Also, I would do the same thing if I were in the shoes of my management so it is hard for me to blame them.

[Tintrlvr]

The biggest positive effect on a macroeconomic scale is the erosion of accumulated wealth in favor of new earnings. That is, those who already have a great deal of wealth will see the relative value of their wealth decline in favor of those who are currently earning income, even if real wages also decline, i.e., on net inflation reduces wealth inequality.

[Skill and Chance]

The biggest positive effect on a macroeconomic scale is the erosion of accumulated wealth in favor of new earnings. That is, those who already have a great deal of wealth will see the relative value of their wealth decline in favor of those who are currently earning income, even if real wages also decline, i.e., on net inflation reduces wealth inequality.

I don't think this is true.  Asset prices are way up.  Real wages are down for everyone but the bottom quartile.  Bottom quartile wages are not up as much as asset prices are.  The US stock market as a whole is nearly 1.5X its February 2020 peak.  Real estate prices in most areas are also about 1.5X February 2020 values, and well over 2X in some Sunbelt cities.  Are people really making 1.5X their hourly wage in February of 2020 doing the same type of work today?  Maybe some truckers and junior restaurant employees, but it's certainly not the norm. 

[Tintrlvr]

The biggest positive effect on a macroeconomic scale is the erosion of accumulated wealth in favor of new earnings. That is, those who already have a great deal of wealth will see the relative value of their wealth decline in favor of those who are currently earning income, even if real wages also decline, i.e., on net inflation reduces wealth inequality.

I don't think this is true.  Asset prices are way up.  Real wages are down for everyone but the bottom quartile.  Bottom quartile wages are not up as much as asset prices are.  The US stock market as a whole is nearly 1.5X its February 2020 peak.  Real estate prices in most areas are also about 1.5X February 2020 values, and well over 2X in some Sunbelt cities.  Are people really making 1.5X their hourly wage in February of 2020 doing the same type of work today?  Maybe some truckers and junior restaurant employees, but it's certainly not the norm.  

The largest portion of accumulated wealth is tied up in relatively fixed value assets, such as bonds, that can never outperform wage inflation when it is anywhere above baseline. That’s not to say that some people with accumulated wealth don’t do well during extended high inflation; they do. But most lose real wealth during extended inflationary periods. Inflation is what destroyed aristocratic wealth in Europe in the interwar period, e.g. Six months in any event is not very long at all to look at this; long term other assets such as real estate cannot keep pace with high inflation.

And, yes, I do think real wages have surged at the bottom. Paying the minimum wage of $7.25/hr was still very much the norm in a lot of businesses across the US pre-2020, but now practically nowhere is offering less than $12/hr, with many that would have been in single digits now in the $16-18/hr range. But, more significantly, wealth inequality goes down even if the gross wealth of those on the bottom stays $0 (and inflation can inflate away their debts with time, too) because the wealth of those on the top becomes worth less.

[jaichind]

The biggest positive effect on a macroeconomic scale is the erosion of accumulated wealth in favor of new earnings. That is, those who already have a great deal of wealth will see the relative value of their wealth decline in favor of those who are currently earning income, even if real wages also decline, i.e., on net inflation reduces wealth inequality.

I would generally agree.  All things equal the wealthy have a good part of their wealth in fixed income which would get hit by inflation.  Wage-earners also get hit but their income will normalize over time. Some of the wealthy will gain from inflation if they own a lot of hard assets backed by debt as their debt service cost goes down.  So I guess the summery would be inflation shifts wealth from one part of the wealthy with a net long-term loss for that group while for lower-income it is a short term loss but a long term wash.

[Skill and Chance]

The biggest positive effect on a macroeconomic scale is the erosion of accumulated wealth in favor of new earnings. That is, those who already have a great deal of wealth will see the relative value of their wealth decline in favor of those who are currently earning income, even if real wages also decline, i.e., on net inflation reduces wealth inequality.

I don't think this is true.  Asset prices are way up.  Real wages are down for everyone but the bottom quartile.  Bottom quartile wages are not up as much as asset prices are.  The US stock market as a whole is nearly 1.5X its February 2020 peak.  Real estate prices in most areas are also about 1.5X February 2020 values, and well over 2X in some Sunbelt cities.  Are people really making 1.5X their hourly wage in February of 2020 doing the same type of work today?  Maybe some truckers and junior restaurant employees, but it's certainly not the norm.  

The largest portion of accumulated wealth is tied up in relatively fixed value assets, such as bonds, that can never outperform wage inflation when it is anywhere above baseline. That’s not to say that some people with accumulated wealth don’t do well during extended high inflation; they do. But most lose real wealth during extended inflationary periods. Inflation is what destroyed aristocratic wealth in Europe in the interwar period, e.g. Six months in any event is not very long at all to look at this; long term other assets such as real estate cannot keep pace with high inflation.

And, yes, I do think real wages have surged at the bottom. Paying the minimum wage of $7.25/hr was still very much the norm in a lot of businesses across the US pre-2020, but now practically nowhere is offering less than $12/hr, with many that would have been in single digits now in the $16-18/hr range. But, more significantly, wealth inequality goes down even if the gross wealth of those on the bottom stays $0 (and inflation can inflate away their debts with time, too) because the wealth of those on the top becomes worth less.

I agree with the bolded.  High inflation is kryptonite for passive multigenerational wealth like thje estates of European nobility.  In modern America, though, a majority of millionaires are entrepreneurs.  This means they are way overexposed to the highest risk assets in the economy and the wealth gap will tend to widen with really low interest rates (strongly favors risk takers) and higher inflation (entrepreneurs selling in-demand products can raise their prices a lot faster and easier than employed people can get higher wages). 

In the American system, to the extent inflation hurts wealthy people, it screws retirees with above average 401K balances and paid off homes.  It also helps young soon-to-be wealthy people who took on large educational or mortgage debt to acquire in-demand skills and live in the right city for wage growth.  This is really an inter-UMC fight between those groups.  The very poorest don't feel price increases due to extensive subsidies and guaranteed access to various essential services.  The very wealthiest entrepreneurs don't feel price increases because they just double the price of their latest tech gadget and still sell nearly as many.

[Tintrlvr]

The biggest positive effect on a macroeconomic scale is the erosion of accumulated wealth in favor of new earnings. That is, those who already have a great deal of wealth will see the relative value of their wealth decline in favor of those who are currently earning income, even if real wages also decline, i.e., on net inflation reduces wealth inequality.

I don't think this is true.  Asset prices are way up.  Real wages are down for everyone but the bottom quartile.  Bottom quartile wages are not up as much as asset prices are.  The US stock market as a whole is nearly 1.5X its February 2020 peak.  Real estate prices in most areas are also about 1.5X February 2020 values, and well over 2X in some Sunbelt cities.  Are people really making 1.5X their hourly wage in February of 2020 doing the same type of work today?  Maybe some truckers and junior restaurant employees, but it's certainly not the norm.  

The largest portion of accumulated wealth is tied up in relatively fixed value assets, such as bonds, that can never outperform wage inflation when it is anywhere above baseline. That’s not to say that some people with accumulated wealth don’t do well during extended high inflation; they do. But most lose real wealth during extended inflationary periods. Inflation is what destroyed aristocratic wealth in Europe in the interwar period, e.g. Six months in any event is not very long at all to look at this; long term other assets such as real estate cannot keep pace with high inflation.

And, yes, I do think real wages have surged at the bottom. Paying the minimum wage of $7.25/hr was still very much the norm in a lot of businesses across the US pre-2020, but now practically nowhere is offering less than $12/hr, with many that would have been in single digits now in the $16-18/hr range. But, more significantly, wealth inequality goes down even if the gross wealth of those on the bottom stays $0 (and inflation can inflate away their debts with time, too) because the wealth of those on the top becomes worth less.

I agree with the bolded.  High inflation is kryptonite for passive multigenerational wealth like thje estates of European nobility.  In modern America, though, a majority of millionaires are entrepreneurs.  This means they are way overexposed to the highest risk assets in the economy and the wealth gap will tend to widen with really low interest rates (strongly favors risk takers) and higher inflation (entrepreneurs selling in-demand products can raise their prices a lot faster and easier than employed people can get higher wages).  

In the American system, to the extent inflation hurts wealthy people, it screws retirees with above average 401K balances and paid off homes.  It also helps young soon-to-be wealthy people who took on large educational or mortgage debt to acquire in-demand skills and live in the right city for wage growth.  This is really an inter-UMC fight between those groups.  The very poorest don't feel price increases due to extensive subsidies and guaranteed access to various essential services.  The very wealthiest entrepreneurs don't feel price increases because they just double the price of their latest tech gadget and still sell nearly as many.

This is a fair comment on entrepreneurial wealth vs inherited wealth. However, to my mind the latter is much more concerning, and even though people like Bezos or Musk are the big headline-grabbers, most real wealth in the US is tied up in inheritances, family trusts, etc. As far as the entrepreneurs go, their wealth is largely notional; Jeff Bezos doesn’t actually have access to more than maybe $1-2 billion that he could actually spend, and a family like the Waltons are much wealthier in practice (and hit hard by inflation).

This is the reason why there is so much handwringing about inflation; it’s bad for the wealthy but basically neutral or good for the lower classes unless truly out of control (which 5% or even 10% annual inflation would not be).

[Okay, maybe Mike Johnson is a competent parliamentarian.]

Some inflation does allow enterprises to adjust the compensation of people in their organization that is overpaid but still valuable.

Oh, jaichind, never change. (By which I mean: please for the love of God change.)

[AGA]

The inflation rate doesn't really matter as long as it's stable and positive.

[Libertas Vel Mors]

Some inflation does allow enterprises to adjust the compensation of people in their organization that is overpaid but still valuable.  In an era of medium-level inflation, you can set the compensation to some positive level below the rate of inflation for overpaid people and not have to explicitly cut their compensation.  People are much more averse to losses than missing out on gains so a -1% change in compensation is way way worse than a 1% increase while the difference between 9% and 7% is not that much in the psychology of most people.   One "benefit" of the 1970s inflation surge was that corporate America was able to make radical adjustments of compensation in line with the productivity of their employees.

A personal example. I am way overpaid for the work I do.  I have been overpaid, I would say, since 2012.  As a result, I have been always been negative about inflation because I know my management if they knew what they are doing, would start to set my compensation increase to a level below a significant level of inflation.  I think they caught on to me being overpaid by around 2017 and have started to set my compensation to below the rate of inflation but the low rate of inflation meant they were a limit to this since I am still fairly valuable to my company so they have to produce a positive competition increase for me for fear of angering me.   Now inflation is surging upward I expect my own compensation increase to stay at 1%-2% a year which would slowly adjust my compensation to converge to my true market value.  The good thing for me is that my income these days is much more dominated by investment income relative to earned income when compared to 10-15 years ago so I pretty much do not care.  Also, I would do the same thing if I were in the shoes of my management so it is hard for me to blame them.

This was very interesting. Obviously, inflation is still by far a net negative, but vs. market wage reductions are definitely a good example of a rare, albeit minor, positive.

[jaichind]

Some inflation does allow enterprises to adjust the compensation of people in their organization that is overpaid but still valuable.  In an era of medium-level inflation, you can set the compensation to some positive level below the rate of inflation for overpaid people and not have to explicitly cut their compensation.  People are much more averse to losses than missing out on gains so a -1% change in compensation is way way worse than a 1% increase while the difference between 9% and 7% is not that much in the psychology of most people.   One "benefit" of the 1970s inflation surge was that corporate America was able to make radical adjustments of compensation in line with the productivity of their employees.

A personal example. I am way overpaid for the work I do.  I have been overpaid, I would say, since 2012.  As a result, I have been always been negative about inflation because I know my management if they knew what they are doing, would start to set my compensation increase to a level below a significant level of inflation.  I think they caught on to me being overpaid by around 2017 and have started to set my compensation to below the rate of inflation but the low rate of inflation meant they were a limit to this since I am still fairly valuable to my company so they have to produce a positive competition increase for me for fear of angering me.   Now inflation is surging upward I expect my own compensation increase to stay at 1%-2% a year which would slowly adjust my compensation to converge to my true market value.  The good thing for me is that my income these days is much more dominated by investment income relative to earned income when compared to 10-15 years ago so I pretty much do not care.  Also, I would do the same thing if I were in the shoes of my management so it is hard for me to blame them.

This was very interesting. Obviously, inflation is still by far a net negative, but vs. market wage reductions are definitely a good example of a rare, albeit minor, positive.

As a manager who has compensation setting responsibilities, these zero-bound physiological barriers have been the bane of this aspect of my job for decades as I try to set compensation to market value for the people in my team.  An overall comp decrease (and in some cases flat) is read as "please leave" by the employee which is in many cases, not the message which is really "you are great but you are overcompensated compared to the market."   Higher inflation actually will help fix that problem.  Note that high inflation is overall bad but does have this side benefit most due to human physiological nature.

[Saint Milei]

Some inflation does allow enterprises to adjust the compensation of people in their organization that is overpaid but still valuable.  In an era of medium-level inflation, you can set the compensation to some positive level below the rate of inflation for overpaid people and not have to explicitly cut their compensation.  People are much more averse to losses than missing out on gains so a -1% change in compensation is way way worse than a 1% increase while the difference between 9% and 7% is not that much in the psychology of most people.   One "benefit" of the 1970s inflation surge was that corporate America was able to make radical adjustments of compensation in line with the productivity of their employees.

A personal example. I am way overpaid for the work I do.  I have been overpaid, I would say, since 2012.  As a result, I have been always been negative about inflation because I know my management if they knew what they are doing, would start to set my compensation increase to a level below a significant level of inflation.  I think they caught on to me being overpaid by around 2017 and have started to set my compensation to below the rate of inflation but the low rate of inflation meant they were a limit to this since I am still fairly valuable to my company so they have to produce a positive competition increase for me for fear of angering me.   Now inflation is surging upward I expect my own compensation increase to stay at 1%-2% a year which would slowly adjust my compensation to converge to my true market value.  The good thing for me is that my income these days is much more dominated by investment income relative to earned income when compared to 10-15 years ago so I pretty much do not care.  Also, I would do the same thing if I were in the shoes of my management so it is hard for me to blame them.

Damn, I didn't know you still posted lol

[Cassandra]

It could be good for certain companies who are being hit hard by labor shortages, as rising prices could force people who had retired or otherwise dropped out of the labor supply back into the labor market. Obviously this specific factor will be bad for workers, who will now face more competition.

[jaichind]

It could be good for certain companies who are being hit hard by labor shortages, as rising prices could force people who had retired or otherwise dropped out of the labor supply back into the labor market. Obviously this specific factor will be bad for workers, who will now face more competition.

But that is merely "the cure for high prices is, high prices"

[Vice President Christian Man]

At one time it benefitted farmers who benefitted from the coinage of free silver, but nowadays I can't think of a positive benefit to inflation.

[jaichind]

https://finance.yahoo.com/news/inflation-starting-chip-away-world-070000600.html

"Inflation Is Starting to Chip Away at the World’s Debt Burdens"

[DC Al Fine]

Some inflation does allow enterprises to adjust the compensation of people in their organization that is overpaid but still valuable.  In an era of medium-level inflation, you can set the compensation to some positive level below the rate of inflation for overpaid people and not have to explicitly cut their compensation.  People are much more averse to losses than missing out on gains so a -1% change in compensation is way way worse than a 1% increase while the difference between 9% and 7% is not that much in the psychology of most people.   One "benefit" of the 1970s inflation surge was that corporate America was able to make radical adjustments of compensation in line with the productivity of their employees.

A personal example. I am way overpaid for the work I do.  I have been overpaid, I would say, since 2012.  As a result, I have been always been negative about inflation because I know my management if they knew what they are doing, would start to set my compensation increase to a level below a significant level of inflation.  I think they caught on to me being overpaid by around 2017 and have started to set my compensation to below the rate of inflation but the low rate of inflation meant they were a limit to this since I am still fairly valuable to my company so they have to produce a positive competition increase for me for fear of angering me.   Now inflation is surging upward I expect my own compensation increase to stay at 1%-2% a year which would slowly adjust my compensation to converge to my true market value.  The good thing for me is that my income these days is much more dominated by investment income relative to earned income when compared to 10-15 years ago so I pretty much do not care.  Also, I would do the same thing if I were in the shoes of my management so it is hard for me to blame them.

This was very interesting. Obviously, inflation is still by far a net negative, but vs. market wage reductions are definitely a good example of a rare, albeit minor, positive.

As a manager who has compensation setting responsibilities, these zero-bound physiological barriers have been the bane of this aspect of my job for decades as I try to set compensation to market value for the people in my team.  An overall comp decrease (and in some cases flat) is read as "please leave" by the employee which is in many cases, not the message which is really "you are great but you are overcompensated compared to the market."   Higher inflation actually will help fix that problem.  Note that high inflation is overall bad but does have this side benefit most due to human physiological nature.

How do you determine market pay in your line of work?

I ask because I went through the recruiting process a year ago and some companies had risible ideas about what market rates were*, despite my field having regular, well-done salary surveys. If firms can be that far off the mark in positions with good information, I can't imagine how hard it would be in areas with less info.

*As in take a substantial pay cut for a promotion, when I was making ~median pay for my role at the time.

[jaichind]

How do you determine market pay in your line of work?

I ask because I went through the recruiting process a year ago and some companies had risible ideas about what market rates were*, despite my field having regular, well-done salary surveys. If firms can be that far off the mark in positions with good information, I can't imagine how hard it would be in areas with less info.

*As in take a substantial pay cut for a promotion, when I was making ~median pay for my role at the time.

We are in the middle of a fierce war for talent to hire for our teams.  The number of people we are trying to hire for my department is quite large.  Even for the group, I am managing I have around 50+ open spots across the globe which creates a large hiring problem for my area.

The battle for talent in NY and London right now is fierce. We end up being in bidding wars and the result of those bidding wars gives us information on the spot rate for labor talent.  The scale we are hiring and the law of large numbers makes us fairly secure we know what the current market rate is. 

The main internal debate is are the rates our competitors for talent desperate ergo they are paying above what the market should be and we might be overestimating the market rate.  This is critical as internal compensation discussions are coming up and we have to make hard choices on how much money is dumped into our compensation and bonus pools.

[Sprouts Farmers Market ✘]

So often, when homegrown talent have compensation exceeded by that of outside hires, they are told that it is because the outside hires are sacrificing their network to leap jobs.

That argument needs to be turned on its head. Companies should be paying a premium for internal talent to stay because they can't afford to lose the familiar front office resources that have the historical knowledge and knowledge of company procedures and know-how needed to operate.

We've had two cases this quarter of someone quitting for another position only to be begged to return a week later with an offer of 40 percent over previous income - after already getting their nearly as sizeable annual raise.

I recognize this is not every case, but we are teetering very close to a headcount that's going to make business continuity very difficult because people are not paid market rate. Our department net headcount is down 25 percent Y:Y, and gross headcount is down over 40 percent. The few external replacements are far from adequate from the get-go. We seem to be reaching a point where even a 40 percent raise is not going to be enough to stay because the work itself is taking such a toll. People feel cheated out of their time and cheated by being forced to take the brunt of the work over external hires making more. It's telling that only two have returned. Many others have been offered.

I think we're going to start having informal protests of people choosing not to deliver. We've seen it selectively in other industries. Pay up because labor is in control now

[Sprouts Farmers Market ✘]

At one time it benefitted farmers who benefitted from the coinage of free silver, but nowadays I can't think of a positive benefit to inflation.

There are lots of benefits to it depending on what type of inflation it is. There are winners and losers for all types of economic turns. Somehow Antonio is the only one to mention debtors in this thread.

It is great for people with  mortgages as your 30 years of payments are paid back significant cheaper. Unfortunately we are increasingly a nation of renters and with the horrific housing shortages, this will drive up interest rates (and at least all-in prices, if listing values come down in real terms) making the dream increasingly impossible for Gen Y/Z.

At least some will benefit on student loans. That piece of debt has more limited upside without an asset behind it.

While supply chains are a part of the problem, a bigger part of it is the returns to labor are increasing so this is a redistribution of income away from capital to labor. Very slight right now, but I expect this to increase for several years. Bargaining power hasn't been this strong in decades thanks to the boomers.