Why do people dislike inflation? The role of missing debt erosion channel

This paper conducts a survey on the preferred inflation rates among Japanese consumers. People’s optimal inflation rate is −0.55% on average, which is below the 2% target of the Bank of Japan. To delve deeper into the cause of people’s aversion to inflation, this paper conducts an information provision experiment with three group. While the two treatment groups are provided with information that inflation could erode the amount of savings or debt, the control group is not provided with any information about erosion. We then examine the impact of the information provision on people’s optimal inflation rate. The findings are as follows. First, providing information on debt erosion increases people’s optimal inflation rate by about one percentage point. Second, the above is only observed among debt holders, particularly high debt holders. Third, providing information on savings erosion does not significantly affect people’s optimal inflation rate, even for those with high savings. These results suggest that the failure to understand the debt erosion channel of inflation could partly explain people’s aversion to inflation.