Why do people hate inflation?

This our weekly discussion of the price level as it relates to Perry Mehrling's money view. The price level is the average price of goods in terms of money or, equivalently, the price of money in terms of goods. But what determines the price level? Why is the price level important? And how does it fit into the money view?

This week, we're discussing a recent Noah Smith Substack post entited Why do people hate inflation? If money were truly neutral, then there should be no reason why anyone would care one way or another.

We tend to colloquially think of “inflation” as meaning “an increase in the real cost of living”, but to economists it really means something more like “fiddling with the unit of account”.

Smith argues that nominal upward wage rigidity is the problem. When average consumer prices increase, wages tend not to move very much. This contradicts the cost-push wage-driven version of inflation we've discussed previously.

We can ask the question of what causes nominal price rigidities to occur in the first place. Would we have nominal rigidities in a world where people didn't expect the price level to be reasonably stable? Would we see wage contracts with inflation adjustments built in?

Another useful Noah Smith Substack post is Your local price changes aren't inflation.

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