Inflation is typically thought of negatively, since rising prices erode purchasing power. But the trade-off is that it also erodes the real value of debt, and that can bolster household real wealth.
Consumers who come to understand this dimension may change their outlook and their behavior, with broad economic implications, according to Goethe University Frankfurt postdoctoral scholar Philip Schnorpfeil, Chicago Booth’s Michael Weber, and Goethe University’s Andreas Hackethal.
They conducted a randomized controlled trial involving more than 3,000 customers of a German bank in July 2022, when inflation was at a 70-year high of 8.7 percent. The researchers first asked participants a series of questions about the economy, their assets, and estimated changes in their net wealth over the previous 12 months. They then split them into a control group, which received information only about the rate of inflation; a “savings-erosion” group that read about how inflation could hurt savers; and a “debt-erosion” group that learned how inflation benefits debtors.
Specifically, the researchers gave each group a realistic but hypothetical example, telling the savings-erosion group, for instance, that inflation would reduce the real value of savings totaling €50,000 a year earlier to €38,800 at the time of the experiment. They told the debt-erosion group that a €50,000 loan taken out a year earlier would currently have a real value of €38,800.
Then they asked participants about their expectations over the following 12 months for real-estate prices, unemployment, interest rates, and household income. They also surveyed the participants about their planned spending.