Inflation Aversion

Listening to the media, I think NPR both today and yesterday, I've seen several mentions of what sounds like 'inflation aversion' by the general public, once by a man on the street in Iowa and once by a man on the street in France, both along the lines of 'everything is so expensive and getting more so', especially food and energy. 

This seems to play into the aversion out there to expansionary monetary policy which would raise nominal spending and, in some combination with various ill understood lags, real output and prices and inflation.  In particular, people seem to see their wage rate or hours worked as unreponsive to expansionary monetary policy, while the prices they pay, especially for energy, as responsive to expansionary monetary policy.  

There are several issues here.  

1) My first reaction is that people who are against monetary expansion don't understand how monetary expansion works.  In standard macro the causal chain is 'monetary expansion' -> higher demand -> more output -> higher marginal costs -> higher prices due to higher current and anticipated costs, with dynamics that depend on monetary policy and price stickiness mechanics as well as cost curves.  Even in a fully flexible price world in which expansionary monetary policy has no effects on output expansionary monetary policy does not raise prices any more than wages, so that it has no real effects. 

2) My second and novel reaction was 'hey, these guys may be more right that I think, under the special circumstances we are in now'.  In particular, nominal wages are sticky downwards and prices are less sticky upwards.  We may now be in a situation where real wages, because of downward sticky wages and a weak labor market, are substantially above market clearing prices.  What this means is that additional labor market demand will not raise wages (but it will raise hours worked and employement).  So what monetary expansion does is raise prices and hours and employment, but not wages for people in jobs with downward sticky wages.  People on fix salaries will see their real income decline with monetary expansion, all additional real labor income will go to people whose hours go up or who become employed again.

This is a (somewhat) plausible short-run story, though how it plays out in the long-run is less clear.  People aren't going to be at the binding zero wage growth constraint for all that long.  Still, it points ou that there may be a short-run conflict of interest  between the employed fix salary worker and other workers that is larger than usual. 

3) Since people see price moving around but don't see their wages moving, they may learn to understand the economy along lines that overemphasizes the above story line. 

Does any of this apply to me?  I'm on a bonus system, so the base wage doesn't really matter all that much, at least in simple models of labor compensation.  Still, there is the issue of how wage 'stickiness' should be conceptionalized when workers receive bonuses or how to conceptionalize price 'stickiness' when firms have sales.   One of the holy grails of macroeconomics... 

Comments

[Doug]

Still, it's a bit baffling why people are so opposed to inflation. Your explanation involves flipping "money illusion" on its head: people see prices rise but don't see their wages rising proportionally. A particular puzzle is why people take this view when many people have borrowed at fixed rates. Shouldn't they welcome a bit of inflation?