Inflation, an increase in the general money price level (“nominal inflation”), causes substantial concern across households, boardrooms, legislative chambers, and central banks alike. It erodes the real value of fixed pensions and annuities and income from bonds. It increases income taxes. It distorts business and government decisions. However, since wages usually go up with inflation over time, the effect of inflation on wage earners is not as significant, right?

Not necessarily! It depends on whether the inflation is the typical inflation caused by loose monetary policy (“monetary inflation”) or “real inflation.” Real inflation is particularly insidious because wages do not go up with real inflation. So, not only is the value of retirement savings, bonds, and the like eroded, but the value of work itself is eroded! To compound the problem, if the Federal Reserve Board tries to fight real inflation with tight monetary policy, it will likely cause unemployment and recession.