Does the wealthiest 0.1% really fear inflation?

April 8, 2014, 8:34 PM UTC

FORTUNE — The International Monetary Fund isn’t known for its candor.

As a political institution with a multitude of sponsors with differing — or even competing — interests, it often puts forth policy recommendations in a swirl of circumlocution, or as Paul Krugman recently asserted, euphemism.

Krugman was referring to a recent IMF report in which the bank, using very imprecise language, seemed to support the idea that central banks should raise their target interest rates from the 1% to 2% norm of today closer to 4%, as many economists have argued. Those supporting higher target levels of inflation argue that:

  • A higher average yearly rate of inflation will give central bankers more leeway during recessions to stimulate the economy. In part, the Fed has had to resort to unconventional monetary policy like quantitative easing because it can’t lower short-term interest rates below zero. If we instead aimed for 4% yearly inflation rather than 2%, the Fed would have a greater ability to stimulate demand during downturns;
  • Higher inflation would help reduce government debt in advanced economies more quickly;
  • And inflation encourages spending money now rather than in the future, something advanced economies, which are still suffering from a lack of demand, need right now.

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But the IMF report doesn’t explicitly argue these points. Instead, it makes vague reference to the first idea and then moves on. Why is the IMF so reticent when other economists have been much more forceful arguing for higher inflation? Krugman believes it’s because the IMF serves the interest of the richest people on earth:

How did the 70s get framed as the ultimate bad time? For sure they weren’t good — but the really bad times for ordinary working families were the big recessions, which took place under Reagan, to some extent under Bush I, and above all after the financial crisis.

Krugman shows that even though real economic growth was somewhat slow in the 1970s, average families saw their real wages rise. On the other hand, financial assets like stocks and bonds didn’t perform so well during that period of high inflation. And who owns most financial assets?

“The 0.1 percent, who according to the Piketty-Saez database ‘only’ get about 4 percent of total wages but have more than 20 percent of the wealth and surely a larger share of financial assets,” Krugman writes.

Therefore, he argues, economists in institutions like the IMF can’t come out in favor of more inflation, because it would harm the wealthy masters of the universe who are the real forces behind institutions like the IMF.

But blaming class warfare for anti-inflation sentiment stems from the same lazy thinking that anti-inflation zealots partake in. After all, if it is in fact just as easy to anchor inflation at 4% as it is at 2% — as pro-inflation economists argue — then is there any logical reason why financial assets should perform worse in such an environment than real estate or other hard assets? Stock values are based on the discounted flows of future nominal earnings, and those values shouldn’t be depressed in an environment of higher but stable inflation.

Bond values will suffer during periods when inflation spikes, but if a central bank were able to maintain yearly 4% price increases in a stable and predictable way, interest rates (and coupon payments) could simply rise to reflect this new reality.

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There doesn’t seem to be any logical reason why the wealthiest 0.1% would be worse off in an environment of higher — yet stable — inflation than they would in the current world of persistently low inflation. Just because financial assets performed poorly in the 1970s doesn’t mean that that was due to higher inflation. In fact, aiming for higher inflation would enable central banks to combat recessions more effectively, and the 0.1% would benefit on the wings of higher overall growth.

That said, there sure are a lot of those in the 0.1% who are suspicious of governments targeting higher inflation. High inflation tends to occur in economies that are mismanaged. And a 4% target implicitly puts faith in the government’s ability to manage the economy, and the very wealthy, on average, are less trustful of government activism than other segments of the population.

But the cohort with the most to lose from higher inflation isn’t the wealthy, but the retired. In the U.S. alone, there are more than 45 million retired people living at least partially off social security. Those payments are indexed to inflation, but many retired Americans supplement that income with money they have saved throughout their working lives, and the purchasing power of retirement savings would be eroded substantially by higher inflation.

The 0.1% are a powerful political constituency, but they have the wherewithal to thrive in inflationary or deflationary environments, and they are likely more concerned about tax policies than whatever central banks are up to. But older people of lesser means do, in fact, have a lot to lose from inflation, and politicians the world over know very well that these people vote.