Looking at these gaps, one could conclude that the rate of inflation does not make any difference in either the pay or wealth gap between individuals L and H. H’s pay is twice L’s pay regardless of inflation rate. And the amount saved by H in year 20 at 5% inflation is worth the same as the amount saved in the same year at 0.5% inflation, in terms of purchasing power. These conclusions may make sense, until we consider two facts that are illustrated in the figure below from FRED, which shows the rate of inflation for IT products and services.
The first fact we should consider is that the rate of inflation is not the same for all items. We can see that, for IT products and services, the rate of inflation is negative most of the time in the graph. Given this, individual H can buy significantly more IT items in year 20 at 5% inflation, and certainly way more than individual L at 0.5% inflation. The second fact we should consider is that the rate of inflation becomes very negative near or during recessions (see left part of the graph, near 2008). This places individual H at an advantage at 5% inflation, because as prices go down, H’s higher absolute savings will buy more.
As you can see, the wealth gap widens more at higher inflation rates. It is noteworthy that more and more of people’s expenses, even large ones, are related to IT products and services. But inflation for these has been typically negative in modern times. So, someone whose pay is adjusted for inflation at a higher rate will be able to buy more and more of these products and services as time goes by. Moreover, that person will also be in a better position to take advantage of economic downturns that lead to sharp downward corrections in prices, which happen regularly. The video linked below provides a brief discussion on this a few other related issues.
