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Inflation’s Emotional Scars

Neither headline numbers nor reasoned economic assessments reveal the toll that surging prices take on many households. The non-monetary cost of today's high inflation follows hard on the heels of the very different but similarly wrenching COVID-19 pandemic, and will likely have two profound consequences.

CAMBRIDGE – Until this year, inflation in advanced economies like the United States and the United Kingdom had been so low for so long that one needed to be well into middle age to remember what living through the price surges of the late 1970s was like. It was bad. Annual consumer price inflation in the US peaked at 13.5% in 1980, while in the UK it hit 24.2% in 1975 and, after a dip, rose again to 18% in 1980.

But the headline numbers do not reveal the toll that high inflation takes. Nor does a reasoned economic assessment of its costs, including the distortions that arise when surging prices interact with the tax system, the erosion of households’ savings, or the effect of the resulting uncertainty on investment and growth.

Economists point out that increases in the inflation rate have a redistributive effect because they harm savers but benefit borrowers by reducing their debt burden in real terms. But that is cold comfort to people with large mortgages who now face the highest interest rates – and hence demands on their disposable income – in recent times.

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