Inflation: who wins and who loses?

"The fact you might find yourself better or worse off, not because of any collective democratic decision, but simply because the savings and investment decisions you have taken at some point in your life make you much richer or poorer, owing to the general price level, leads to significant discontent."

Inflation affects everyone, but not in the same way. Who wins and who loses?

Prices rise and fall for many reasons and certain products can make our shopping basket more expensive. But what exactly is inflation? We talk about inflation when consumer price levels increase broadly and persistently over time.

Its impact goes far beyond the loss of purchasing power: inflation redistributes wealth, inevitably producing winners and losers. These effects are later offset by the actions of various authorities (governments and central banks), adding complexity to the analysis and triggering a fresh redistribution. But first, it is crucial to understand the initial impact.

In this episode of CIENxCIEN, Ana Comellas invites Galo Nuño, Director General Institutional and European Relations and Transparency at the Banco de España, to explain in detail the direct redistributive effects of inflation on household wealth, before any public intervention takes place.

When inflation grows faster than our income it has a negative effect on our wallets: our purchasing power decreases and we can’t buy as much with the same amount of money. The impact of inflation on each household also depends on the weight in its shopping basket of those items whose prices increase sharply. Inflation can also help or hurt us depending on our savings and debt, the type of loans we’ve taken out and how we’ve invested.

Through these three channels – income, wealth and consumption – inflation arbitrarily redistributes wealth among households, without any social agreement. That is why public institutions take measures to offset the social inequalities created by inflation.

As Galo explains, “governments implement fiscal policies and central banks monetary policies to prevent these redistributions of wealth that have not been agreed upon collectively.” A clear example is how the European Central Bank, as part of its mandate to maintain price stability, uses various mechanisms to ensure the inflation rate does not exceed 2% over the medium term.

Far from being a topic reserved for experts, keeping up to date on inflation and understanding its effects helps us make better spending, saving, borrowing and investment decisions. With a sound financial education, we can arrange our personal finances in order to mitigate the adverse effects of inflation.

Transcription (in Spanish) (114 KB)

Galo Nuño Barrau

• Galo holds a PhD in Telecommunications Engineering from UPM and an MSc in Engineering from Stanford University, and he is currently Director General Institutional and European Relations and Transparency at the Banco de España. He has 20 years of experience in central banking, commercial banking and management consulting, at the B IS, the ECB, BBVA and BCG. His research focuses on monetary policy and financial stability and his published work has had a far-reaching impact.