1
$\begingroup$

Suppose there is inflation in our country, but we take a short term, thus some prices are sticky and there is non-positive "growth" of the real GDP. In other words, we experience stagflation.

If I understand correctly, non-positive "growth" of the real GDP means that our total wealth does not grow. BUT at the same time I know that stickness of prices allows some people/corporations to make some real short-term profits. They increase their personal wealth while total wealth of the economy does not increase. It seems logical to conclude that they must be increasing their wealth at cost of other actors. But who are these other actors? These people must be ones that experience losses. And who would experience losses under this situation? People who sell goods (including their own labor) and for some reasons (like contracts that take time to renegotiate, menu costs, etc) don't rise prices on their goods fast enough. So there would be redistribution of wealth from actors with sticky prices to actors with more flexible prices.

Is my reasoning correct? Is my conclusion true?

$\endgroup$
1
$\begingroup$

This would redistribute some resources from those who can't change their prices quickly enough, but studies (like this study here) show that the most important redistribution effect of inflation occurs along debtor/lender lines.

$\endgroup$
2
  • $\begingroup$ I don't think this study is relevant. Notice, I wasn't talking just about inflation. I was talking about situation when real GDP either shrinks or stays the same. Or even more precisely, I was talking about stagflation. $\endgroup$
    – user161005
    Mar 1 at 10:54
  • $\begingroup$ @user161005, it's not always possible to be precise in the abstract about winners and losers, because there can be a variety of different causes for inflation or falling GDP, and a variety of different circumstances in which it takes place. For example, lenders without index-linked returns must be hurt by inflation, but if the returns are index-linked then inflation is of no effect (unless bankruptcy of the debtor ensues). Similarly, workers who aren't strong enough to bargain for inflation increases in wages are harmed by inflation, but those who are strong enough are not harmed. $\endgroup$
    – Steve
    Mar 1 at 12:30

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.