Households and the inflation-related debt erosion
Are households aware that unexpected inflation erodes the real value of debt with fixed nominal interest obligations? This is the question that Schnorpfeil et al. address in this paper. They ran a large randomized control trial (RCT) on customers of a major German bank in July 2022 when inflation in Germany was at a 70-year high of 8.7%. The participants received information on inflation-induced erosion of either nominal assets or nominal debt. They find:
- Even though survey respondents are on average better educated than the average German, only 9% of respondents believe the impact of unexpected inflation on fixed-rate loans is very positive and 25% believe it is positive. Better awareness was positively correlated with business education, wealth, and stock ownership.
- Providing information on the erosion channel, particularly on debt, affects beliefs about nominal positions and own real net wealth and even reduces general debt aversion. More specifically, learning about inflation-induced loan erosion: a) increases wealth estimates relative to the control group by 2.5–2.9 percentage points; b) incentivizes households to accept a mortgage with a higher debt-to-price ratio.
- Importantly, learning about debt erosion leads to higher planned and actual spending. “Hence changes in real net wealth affect households’ consumption response to inflation, conditional on households being aware of the wealth effects of inflation.”
Households’ Response to the Wealth Effects of Inflation
Authors: Philip Schnorpfeil, Michael Weber, Andreas Hackethal
From: Goethe University Frankfurt, University of Chicago
Impact of inflation on moderate and low-income households in the U.S.
The financial burden of inflation is not borne equally by all households. In particular, Lowell R. Ricketts finds that the impact is most severe for individuals who are employed but are also income-constrained and have limited assets:
As of June 2023, 85.7% of individuals in households that earned less than $50,000 a year reported being significantly stressed. Stress levels from rising prices declined with household income: The highest income group (more than $100,000) had a stress level that was 25.5 percentage points lower than that of the lowest income group. Even so, a majority of the higher-income group (60.2%) were also stressed by rising prices.
How Low- and Moderate-Income Households Are Coping with Inflation
Author: Lowell R. Ricketts
From: Federal Reserve Bank of St. Louis
Inflation differences among households across euro area countries
Aggregate inflation rates in the euro area differ considerably between countries. Such differences also persist over longer periods, even decades, argue Stresser et al. in this paper. For example, as shown on the chart below, inflation on supermarket items, calculated from actual household transactions, highlights significant inflation differences between euro area countries: inflation of supermarket items is less than 0.2% in France but more than 2.2% in Austria and the Netherlands. The authors find that different inflation rates across EU countries originate from price differentiation by retailers. Households barely differ in terms of the product categories they consume, but massively in terms of specific products and brands.
Inflation heterogeneity at the household level
Authors: Georg Strasser, Teresa Messner, Fabio Rumler, Miguel Ampudia
From: ECB
