Inflation Gap: The Rich Rise, the Workers Fall

If prices go up by 10%, the buying capacity of regular individuals drops by 10%. This happens because more money is required to purchase the...

If prices go up by 10%, the buying capacity of regular individuals drops by 10%. This happens because more money is required to purchase the same items. However, if you are a rich person, you might not even realize if prices jump by 20%. This is because the value of properties and other assets increases along with inflation, and (if interest rates rise to control inflation) income from interest also increases. This is how inflation creates winners and losers.

Mark Blyth, a renowned professor of international political economy at Brown University, spoke with WEEKLY BIZ in a video interview on the 5th. With high inflation now considered a 'chronic illness' across major economies, many economic players—ranging from businesses to everyday people—are experiencing hardship. However, Blyth noted, "There are clear winners and losers when it comes to inflation." Recently, Blyth released a new book called *The Inflation Onslaught* on the 12th, which questions traditional views on inflation.

◇Is Inflation a Burden for All?

- Does inflation always have negative consequences?

It varies based on the inflation level. Price hikes that coincide smoothly with economic expansion are considered 'good inflation.' Since the 1990s, central banks around the globe have aimed for an annual inflation rate of 2%. Conversely, 'bad inflation' occurs when prices increase at a faster pace than economic growth, leading to a decline in real buying capacity. Individuals require more funds to purchase the same items, yet their earnings do not increase proportionally. For instance, if salaries stay the same while prices jump by 10%, buying power decreases by 10%—a very challenging scenario.

- Are workers more impacted?

Yes. If you are a rich person who frequents an upscale organic grocery store, you might not even realize a 20% price increase because your assets have also appreciated. It's not only about buying power. When prices go up, central banks raise their benchmark interest rates to control inflation. Higher rates lead to increased interest costs, and those with poor credit scores end up paying more on loans, making things harder for them. On the other hand, affluent people with significant financial assets (such as savings in banks) benefit as their income from capital increases when interest rates go up. The statement that 'everyone is affected by inflation' is not accurate.

◇Oil Firms and Financial Institutions Benefit from Large Gains

- Which groups, other than the affluent, gain from inflation?

Energy firms serve as a clear example. When the costs of oil and natural gas rise sharply, their income surges. During the inflation that followed the pandemic, nations that produce oil saw significant gains. While many faced high prices, Saudi Arabia launched a football league and invested hundreds of millions of dollars to bring in top international players such as Ronaldo and Neymar. Although not as large as the oil companies, banks also gain from inflation.

- How do financial institutions generate revenue?

Suppose a central bank increases the benchmark rate from 2% to 6% in an effort to curb inflation. At first, commercial banks typically raise deposit rates only marginally. Although there are multiple explanations, banks usually avoid offering higher interest to depositors. Banks handle not just customer deposits but also reserve funds and loans from global financial markets. Still, interest rate increases result in a 'windfall' for banks. Picture passing by an orchard when a gust of wind (inflation) blows, causing apples (interest income) to drop as a result of the central bank's rate rise.

◇Is Inflation a Monetary Issue?

- What causes inflation?

The conventional explanation suggests that it happens when 'too much money is chasing too few goods.' Milton Friedman, a well-known economist, once said, 'Inflation is always and everywhere a monetary phenomenon.' However, recent instances of inflation show that this isn't always accurate. For example, Germany's high inflation was due to the interruption of natural gas supplies from Russia—a problem on the supply side, not related to money. Consider 1970s America: Millions were called up for the Vietnam War, which reduced the available workforce. This shortage of labor led to higher wages, which in turn caused inflation. Moreover, two oil crises (in 1974 and 1979) resulted in a sharp rise in oil prices. At that time, inflation was not solely about the amount of money in circulation.

- What is the best way to control inflation?

If inflation was solely 'monetary,' the only answer would be to increase interest rates to slow down the economy. However, the real situation is different. If prices go up because of high oil costs, the core solution is boosting oil supply. Increasing rates won't resolve oil shortages. Inflation needs to be examined from multiple perspectives.

- In your opinion, how is South Korea's inflation currently?

The greatest challenge is aging. The expense of caring for the elderly will surely increase. As the economy moves into a period of slow growth, 'bad inflation'—where prices rise faster than economic growth—may continue. Nevertheless, price drops caused by business competition and technological progress will provide relief.

- What steps can be taken to get ready for a period of high inflation?

Individuals who are young and lack assets or those who pay rent have no practical way to fight against rising prices. The government plays a vital role in this situation. In my opinion, increasing the availability of housing is essential. Constructing homes demands skilled labor and modern technology. Increasing the housing supply can also boost the construction sector and generate employment opportunities.