Inflation's Impact on American Households

David Altig, Alan Auerbach, Erin F. Eidschun, Laurence Kotlikoff and Victor Yifan Ye

No 32482, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The post-COVID price surge has reignited interest in inflation’s impact on American households. Even if anticipated and with full market adjustments, inflation affects households through its interaction with the fiscal system, which is the focus of this paper. Inflation affects households through its interaction with the fiscal. We run the 2019 Survey of Consumer Finances (SCF), assuming different inflation rates, through the Fiscal Analyzer (TFA) – a life cycle, consumption-smoothing tool incorporating all major federal and state fiscal programs. Before doing so, we adjust the SCF data to neutralize inflation’s non-fiscal effects. A permanent increase in the inflation rate from zero to 10 percent reduces median lifetime spending by 6.82 percent. This impact is smaller – 4.74 percent – when fiscal COLAs aren’t lagged. But the big stories are the progressivity of inflation’s increase in net taxation, its age pattern, and its heterogeneity. The 15.9 percent median lifetime spending loss of the top 1 percent from 10 percent inflation is roughly 2.5 times that of the bottom quintile. Middle aged households are hit far harder because they have more asset income, which, with inflation, is taxed at a higher effective rate. The 25th percentile of spending changes is a reduction of 9.84 percent. The 75th percentile change is still a reduction of 4.83 percent. The maximum spending decline (increase) across all households is 64.9 (46.7) percent. Thus, the distribution of welfare is highly sensitive to significant, ongoing inflation.

JEL-codes: D63 E60 E62 H20 (search for similar items in EconPapers)
Date: 2024-05
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Forthcoming: Inflation's Fiscal Impact on American Households , David Altig, Alan J. Auerbach, Erin Eidschun, Laurence Kotlikoff, Victor Yifan Ye. in NBER Macroeconomics Annual 2024, volume 39 , Eichenbaum, Leahy, and Ramey. 2024

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