Exchequer argues that even an annual inflation rate of 2 percent (which is higher than TIPS spreads suggest the market expects over the next ten years) “costs a big fat $1.4 trillion a year.” He gets that figure by applying the inflation rate to Americans’ net worth (in other words, he takes 2 percent of $70 trillion). He admits it’s an “imperfect” estimate.
So it is. Exchequer understates some costs of inflation, but more importantly overstates them in the present context. To my mind, the main understatement is the omission of the effect of inflation on effective capital-gains tax rates. We don’t index the tax for inflation. We should do so (or, better yet, eliminate the tax).
Exchequer writes, “Of course there are trade-offs from inflation: but practically all of the costs fall on savers and investors, and all of the benefits accrue to debtors and spenders.” Sometimes that’s the way the costs and benefits split, but not always, and there is reason to think this is one of the exceptions.