INFLATION AND WELLBEING
World Wellbeing Panel Survey | July 2022
by Tony Beatton (Queensland University of Technology), Ada Ferrer-i-Carbonell (IAE-CSIC and BSE), Paul Frijters (LSE)Arthur Grimes (Victoria University of Wellington)
There was an almost full agreement with statement 1, 19 of our panelists agreed or completely agreed with the statement, while only one opted for “neither agree nor disagree”. This question has generated more consensus among our panelists than we typically see.
Some of our panelists’ (Bruno Frey, Ruut Veenhoven, Heinz Welsch, and Arthur Grimes) refer to the empirical evidence that shows a strong and consistent negative correlation between happiness or life satisfaction and inflation (Di Tella et al., 2001) and to the fact that the correlation is stronger for those at the bottom of the income distribution (Welsch and Kühling, 2015). Arie Kapteyn argued that observed individual behaviour indicates that inflation is wellbeing damaging, as “governments in power appear to get punished for high inflation”.
Other panelists, who agreed with the statement, focussed on the different channels through which inflation can affect wellbeing and pointed to the different impact across social groups. The most mentioned channel is the (probable) decrease in real wages and income associated with higher inflation that will lead to a wellbeing loss (Arthur Grimes, Leonardo Becchetti, Ada Ferrer-i-Carbonell, Arie Kapteyn, Daniel Benjamin, Stephen Wu, Wenceslao Unanue, Martin Binder, and Francesco Sarracino). Mark Wooden argued that this can be temporary, as wages might respond to inflation. He notices, for example, that in Australia “pensions and out-of-work benefits are adjusted to maintain their value against increases in the cost of living”. In this line, Wenceslao Unanue states that the inflation will impact more on the poorest who in many cases do not receive income adjustments for inflation. Francesco Sarracino argues that the price increases will affect the poor most, because inflation increases the price of what we need to feed our families.
Andreas Knabe emphasizes the fact that inflation driven by supply-side factors, such as the current one clearly makes people poorer and reduces their well-being. Tony Beatton wonders “[…] how much of this inflationary pressure was initiated by Government COVID policy responses and resultant supply side issues in countries like China, who are still (COVID) locked down […]”. He continues by reminding us that in 1973-74 we saw runaway inflation ignited by the first OPEC oil shock (Figure 1); today we see oil and gas supply issues with Russia again fuelling inflationary pressures.
Figure 1: Australian inflation rate 1948-2017 (What is inflation? Why is the CPI so high? And how is the RBA planning to bring it back down? – ABC News)
Another repeatedly mentioned channel, beside real incomes, is the correlation between inflation and financial uncertainty and insecurity and subsequent anxiety (Daniel Sgroi, Daniel Benjamin, Gigi Foster, Andreas Knab, Martin Binder). Stephen Wu relates to this and talks about the psychological cost that can go beyond actual costs in terms of standard of living. Andreas Knabe writes “[…] the dramatic discrepancy between political inflation targets and actual inflation rates increases uncertainty about the future development of prices and living standards. Such uncertainty is also detrimental to well-being.” Maurizio Pugno highlights that this uncertainty comes on top of an already very deteriorated situation and cites in example the COVID pandemic or the war in Ukraine.
The panelists also emphasized that some individuals might win from inflation, notably debt holders (Leonardo Becchetti, Arie Kapteyn, and Wenceslao Unanue), although Arthur Grimes contested this by arguing that asset prices are falling “so people's investments are worth less in nominal terms, not just in real terms”.
Maurizio Pugno and Paul Frijters are perhaps the ones that show more worries about the current situation. Paul Frijters argues that inflation harms savings and leads to distortions, uncertainty, evasive behaviour, and widespread misery. Like other panelists who agreed with the statement, Paul emphasizes that inflation is particularly harmful to the poor, because price increases occur on their everyday commodities, notably food and energy. Paul finishes his statement by writing “[…] we can expect widespread famine and riots in poor countries. We are currently witnessing a genuine wellbeing disaster.”
Chris Barrington-Leigh also cites earlier evidence showing “the relative importance of unemployment versus inflation […]” and expects “[…] conflict and polarization due to social media algorithms and environmental challenges all loom large, and the threat of inflation on wellbeing cannot be seen outside of the context of the other simultaneous threats.”
There was less agreement in relation to Statement 2, 11 agreed or completely agreed with the statement, 6 neither agree nor disagree, and 3 disagreed with the statement.
Those who agree with this statement focused on the impact of different policies aimed at containing inflation (Bruno Frey, Tony Beatton, and Chris Barrington-Leigh). First, interest rates are rising as a response to inflation (monetary policy) which will deteriorate the economic situation of those families who have debt such as home mortgages (Arthur Grimes). This monetary policy will probably lead to an economic recession with firm closures, demand reduction, and unemployment increase (Arthur Grimes, Heinz Welsch, Maurizio Pugno, and Wenceslao Unanue). Unemployment increase will lead to considerable wellbeing losses (Andreas Knabe, Arthur Grimes, Heinz Welsch, Maurizio Pugno, and Chris Barrington-Leigh). Our panelists argued that Government policy responses and their consequences will have redistributive consequences from the income-reliant poor to the capital-holding rich, thus harming the poorest and the most vulnerable.
Secondly, some panelists argued about the importance of governments not entering into contractionary fiscal policy, but instead developing policies aimed at alleviating poverty and compensating or the distributive effects of inflation (Ada Ferrer-i-Carbonell, Heinz Welsch and Maurizio Pugno) as well as other expansive fiscal policies (Chris Barrington-Leigh). If this is not done, we can expect further deterioration in wellbeing (Arthur Grimes).
The fiscal and monetary contraction (e.g., through increased unemployment) will harm wellbeing more than inflation and real income loss (Andreas Knabe) and will disproportionally impact upon the poorest and the more vulnerable (Arthur Grimes). Nevertheless, some panelists argue that not responding to inflation might lead to worse economic misery in the future (Daniel Benjamin, Martin Binder, and Mark Wooden). Paul Frijters, who neither agrees or disagrees with the statement, writes that “[…] it is about the likely balance of effects” and he continues: “The major cause was money printing during lockdowns and the supply disruptions of lockdowns, which should be avoided in the future. We are 'merely' seeing the inevitable consequence of those actions by authorities over the last 40 months. In the longer run authorities can and should (from a wellbeing point of view) improve many aspects of the monetary and regulatory system.”
In Australia, this process began last week with the initiation of a review of the Reserve Bank of Australia which earlier this year, when rates were close to zero, predicted no interest rate rises until 2023 and has just this month suggested a ‘balanced rate’ should be closer to 3 - 3 1/2 percent. Tony Beatton suggests this may be the politicians shining the light of investigation away from revealing the consequences of the Government’s COVID policies.
On the bright side, some panelists think the energy price increase might change consumption patterns towards more sustainable goods and energy sources (Francesco Sarracino).
Those who neither agree or disagree with statement 2 argued that it will depend on how each country implements its inflation-response policies and whether they look at the short or long term (Ruut Veenhoven, Daniel Sgroi, Gigi Foster, Stephen Wu, and Martin Binder).
Finally, a set of panelists disagreed with statement 2. Arie Kapteyn argued that “if inflation is bad then combatting it by itself cannot be bad. But there may be some short-term pain” and Leonardo Becchetti balanced the statement by arguing that while monetary policy to fight inflation will be wellbeing damaging, this might be accompanied by expansive fiscal policy, which will improve wellbeing. Mark Wooden and a number of other panelists conclude by stating: not fighting inflation will be worse than the policies required to contain it.
Di Tella, Rafael, Robert MacCulloch and Andrew J. Oswald. 2001. "Preferences over Inflation and Unemployment: Evidence from Surveys of Happiness." American Economic Review, 91(1), 335-341.
Welsch, H., Kühling, J. (2015), Macroeconomic Preferences by Income and Education Level,: Evidence from Subjective Well-Being Data, Review of Economics and Finance 5, 15-32 .