How Much Can Households Gain and Lose with Unexpected Inflation?
Inflation is a common concern for U.S. households. But it affects different people in different ways. Generally, unexpected inflation redistributes from nominal lenders to nominal borrowers because the amount of money a borrower needs to repay is worth less in real terms than the amount originally borrowed. Most households, however, are nominal lenders and borrowers at the same time, holding both nominal assets (e.g., deposits) and liabilities (e.g., mortgage). Therefore, to understand how a household is affected by inflation, one must take a closer look at their balance sheet.
In this blog post based on recent research by Yu-Ting Chiang and Ezra Karger,See Yu-Ting Chiang and Ezra Karger, “Nominal Maturity Mismatch and the Liquidity Cost of Inflation” (PDF), Federal Reserve Bank of St. Louis Working Paper 2024-031A, September 2024 we show that households’ nominal assets usually feature a much shorter time horizon than their nominal liabilities. As a result, unexpected inflation generates losses for households in the short term as the real value of their nominal assets (such as wages and bank deposits) declines, while some households may gain in the long term as the real value of nominal liabilities (such as mortgages) declines. We assess gains and losses for U.S. households over different time horizons during the 2021-22 inflation episode.
Building Household Balance Sheets
We used data from the Survey of Consumer Finances (SCF), which provides information on household balance sheets, including assets like income, stocks and bonds, and liabilities like mortgages and other debt. For each asset or liability on a household’s balance sheet, we constructed a payment stream to represent its claims or obligations. For example, from each household’s mortgage balance, length and interest rate, we can calculate how much the household will have to pay every year on its mortgage until it is paid off. Similarly, we used each household respondent’s age, sex, race and education to predict expected future income, and we treated this income stream as an asset. These payment streams give us the yearly values of each asset and liability for each household starting in 2021 and going up to 30 years into the future.Since there was no SCF survey administered in 2021, we use the 2019 survey, but then adjusted the dollar values to be in terms of 2021 dollars.
We then separated the payment streams from each asset and liability into a fraction that is “nominal,” which does not adjust its value with inflation, and a fraction that is “real,” which adjusts with inflation. For example, a car can be considered a real asset, since it’s value to a household does not directly change with inflation. Fixed-rate mortgage payments, on the other hand, represents a nominal liability as the amount of payment does not adjust with inflation. Another important category is a household’s labor income. Since wages are usually fixed in the short run but adjust with inflation gradually, we assumed only 30%, 60% and 90% of labor income in the first, second and third years, respectively, adjusts with unexpected inflation.
Households’ Nominal Assets and Liabilities over Different Time Horizons
The first two rows of the first table use the payment streams to show the value of asset and liability holdings over different time horizons for the average household in the fifth, or middle, wealth decile. Comparing the two rows, we can see that household’s holdings of nominal assets are concentrated in the first few years, whereas nominal liabilities are spread out across longer time horizons. This is intuitive because most households’ largest liabilities, mortgages, have maturities of up to 30 years. In contrast, their largest asset, labor income, has a short nominal horizon: Salary contracts are usually rigid initially but mainly catch up with inflation after a few years.
In their 2024 working paper, Chiang and Karger refer to this difference in the time horizons of nominal assets and liabilities as a “nominal maturity mismatch.” To understand how unexpected inflation affects households due to this mismatch, the two authors calculated the household’s net nominal position in the third row as the difference between the value of nominal assets and nominal liabilities. The average middle-wealth household has a positive net nominal position for the one-year and the two- to five-year horizons but a net negative nominal position over longer time horizons (six to 30 years).To compare amounts at different points in time, we calculated the present value of their payments using Treasury yields. When there is unexpected inflation, a household with nominal claims to cash flows in the first few years (a positive net position) experiences a loss in real value. On the other hand, with their nominal liabilities exceeding assets in the long run (a negative net position), they see a gain as the real value of their debt burden in those periods is reduced.
1 Year | 2-5 Years | 6-30 Years | |
---|---|---|---|
Nominal Assets | $94,476 | $56,884 | $18,141 |
Nominal Liabilities | $45,000 | $51,361 | $55,657 |
Net Position | $49,476 | $5,523 | −$37,516 |
SOURCE: Chiang and Karger, 2024. | |||
NOTE: Values are in 2021 dollars. |
Assessing the Impact of the Inflationary Shock
To assess how much households stand to gain and lose over different time horizons due to the 2021-22 inflation episode, we calculated a measure of “inflation shocks” over different time horizons, as shown in the first row of the next table. Essentially, this allows us to estimate the impact of the 2021-22 inflation shock at different points in the future, and study how households are affected by the episode. For example, over the one-year time horizon, households originally expected inflation to be 2%, but when realized inflation was 8%, we say that the inflation shock was 6%. We applied the same calculation to longer time horizons: If inflation over the next two years was expected to be 2%, but then inflation in the first year was 8%, and people updated their expectations for inflation in the following year to 4%, we say the inflation shock was 4% (annualized) for the two-year horizon, as an average of the 6% in the first year and 2% in the second year.Computed as the average of the shock in year 1 and year 2: ((8% − 2%) + (4% − 2%))/2 = 4%. For year 3, we would take the average of the first 3 years, and so on. The shock was calculated using the change of the consumer price index from January 2021 to January 2022. See Chiang and Karger’s 2024 working paper for further details on their methodology. For each horizon, the cumulative effect of unexpected inflation is the annualized inflation shock multiplied by the relevant number of years.
Applying the cumulative effect of inflation shocks to the net nominal positions of the corresponding time horizons gives us the effect of unexpected inflation on households. Rows two and three show these effects in dollar terms and as a percentage of net worth. In the shorter run, unexpected inflation causes these households to lose around $3,000 for the first year (as the real value of their nominal assets declines more than the real value of their nominal liabilities) and around $350 for the two- to five-year horizon. In the longer run, however, households gain around $4,000 due to a decrease in the real value of their nominal liabilities exceeding the loss in real value of assets. In other words, the debt they must pay off becomes relatively cheaper (via liabilities like fixed-rate mortgages). Summing the gains and losses shows that the long-term gains outweigh the short-term losses, as this typical household gains around $630, or 0.03% of their net worth, due to the unexpected inflation shock.
1 Year | 2-5 Years | 6-30 Years | |
---|---|---|---|
Cumulative Effect of Unexpected Inflation | 6% | 8% | 11% |
Dollar Value of Redistributive Effects | −$3,060 | −$349 | $4,043 |
Redistributive Effects as Percentage of Net Worth | −0.16% | −0.02% | 0.21% |
SOURCE: Chiang and Karger, 2024. | |||
NOTES: The cumulative effect of unexpected inflation is the annualized inflation shock multiplied by the relevant number of years. Dollar values are in 2021 dollars. |
The Effects of the Inflation Shock across All Deciles
While the tables focus on households in the fifth wealth decile, this pattern is a much more prevalent phenomenon. The figure below shows the effect of the inflation shock for each wealth decile relative to their total net worth, from those with the least wealth (the first decile) to those with the most wealth (the 10th decile). We separately show percent gains and losses, with gains above the x-axis and losses below the x-axis. The different colors represent gains and losses at different time horizons. The red dashes represent the total (net) effect.
For the Least Wealthy, Short-Run Losses Outweigh Long-Run Gains

SOURCE: Chiang and Karger, 2024.
NOTE: The red dashes indicate net redistribution.
From the first to ninth deciles, households experience short-term net losses (since the dark blue and light blue columns below zero are larger than those above zero) and long-term net gains (the orange columns above zero are larger than those below zero). The tenth decile experienced losses both in the short term and in the long term.
Focusing on the red dashes, we see that the bottom wealth decile (first) does gain some amount of wealth in the long run, but these gains are dwarfed by short-run losses, so the bottom decile of the wealth distribution loses in total. The wealthiest decile (10th) also loses, though some of the middle deciles gain slightly.
In conclusion, this analysis shows that liabilities held by households tend to have longer durations than assets. Consequently, unexpected inflation causes many households to lose in the short run and gain in the long run. On balance, this means that households at the bottom and top of the income distribution lose because of unexpected inflation, while households in the middle deciles actually gain a small amount.
However, simply calculating the present value of households’ gains and losses and adding them up across different time horizons may not truly represents how households are affected by inflation. The difference between short-run losses and long-run gains is especially important for a group of “illiquid” household—those households who are short on cash and find it hard to borrow money in the short run. In future blog posts, we will explore how the short-run losses generated by unexpected inflation can outweigh their long-run gains for households who find it difficult to borrow, leading to a “liquidity problem” of inflation.
Notes
- See Yu-Ting Chiang and Ezra Karger, “Nominal Maturity Mismatch and the Liquidity Cost of Inflation” (PDF), Federal Reserve Bank of St. Louis Working Paper 2024-031A, September 2024.
- Since there was no SCF survey administered in 2021, we use the 2019 survey, but then adjusted the dollar values to be in terms of 2021 dollars.
- To compare amounts at different points in time, we calculated the present value of their payments using Treasury yields.
- Computed as the average of the shock in year 1 and year 2: ((8% − 2%) + (4% − 2%))/2 = 4%. For year 3, we would take the average of the first 3 years, and so on. The shock was calculated using the change of the consumer price index from January 2021 to January 2022. See Chiang and Karger’s 2024 working paper for further details on their methodology.
Citation
Yu-Ting Chiang, Ezra Karger and Mick Dueholm, "How Much Can Households Gain and Lose with Unexpected Inflation?," St. Louis Fed On the Economy, Oct. 22, 2024.
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