Who Pays for Inflation?

Samir Sonti and JW Mason in Phenomenal World:

SAMIR SONTI: For a long time, I have been preoccupied by the way the politics of inflation affect working people. There is hardly anyone I’ve learned more from about this subject than Josh Mason. To kick us off, it might be helpful to get some basic definitions on the table. Headlines tell us that inflation is at a forty-year high, but for working people, a rising cost of living is nothing new: house prices, for instance, have been climbing for years. Could you explain what precisely we mean by the term inflation? What distinguishes the recent inflation we’ve experienced from some of these other trends?

JW MASON: The definition of inflation that people are most familiar with is a period of rising prices. But as you pointed out, that immediately invites the question: which prices? There are many prices in the economy, and they do not all move in lockstep. When we look at inflation, we’re measuring the average price of things that a representative household buys. But this, again, invites a question: Which household? Different people buy different things, and the average prices of some goods are difficult to calculate. There is no such thing as “the price level” out there in the world, just various ways of constructing it.

In general, when we measure inflation we look at goods and services that people use. We’re not including stocks, cryptocurrency, interest payments, and other financial assets. But we’re also including some things that aren’t goods and services. For instance, the biggest single item in the consumer price index is what’s called “owners equivalent rent.” This is not a price that anyone pays—it is an estimate by the Bureau of Labor Statistics of how much it would cost a homeowner to rent their home, and computing it is a fairly complicated process.

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