What Risks Do Near Retirees and Retirees Face from Inflation?

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In June 2022, U.S. inflation peaked at 8.9 percent – a dramatically high level after nearly three decades of relatively stable prices.  Because inflation has been so low for so long, the risks it poses have been generally overlooked and recent history does not offer much practical insight on its impact.  This paper uses economic theory and data from the Survey of Consumer Finances to illustrate how a bout of high inflation affects older households’ standard of living under different hypothetical macroeconomic scenarios.  It shows that high inflation generally harms older households, but the magnitude of the impact depends on two offsetting factors: 1) the extent to which income and investments keep pace with rising prices; and 2) the amount of fixed-rate debt.  These two factors lead to varying risk across the age and wealth distribution.  Additionally, when recent inflation started to put pressure on household budgets, many responded by reducing new saving and increasing withdrawals from existing saving.  Incorporating these behaviors into the scenario analysis shows that households largely offset the immediate loss of real income, but substantially reduce their wealth available to fund future consumption.

The Center for Retirement Research at Boston College gratefully acknowledges Jackson National Life Insurance Company for supporting this research.