Most economists and policymakers consider price stability to be a feature of a well-functioning economy and a necessary condition for sustained economic growth. But not everyone subscribes to the same definition of price stability — and, for the most part, its meaning has changed over time.

For the Bank of Canada, for example, price stability meant zero inflation in the early 1990s. Since then, it has come to imply positive but low and stable inflation, as illustrated by the 2% target.

Nonetheless, most seem to agree that today’s relatively high inflation rate is undermining the proper functioning of the Canadian economy, imposing too high a cost on society. Among the many costs associated with inflation, one stands out clearly: inflation reduces the value of money.

Indeed, for most experts and non-experts, the decrease in the value of money is usually the first cost associated with inflation that comes to mind. For example, if inflation is 10%, we all understand that in one year we will be able to buy about 10% less goods and services than we can buy today with a given amount of money. .

Who is affected by this loss of value of money?

Since it reduces the purchasing power of wages, many pundits and politicians try to convince us that workers are the most affected by inflation. But is it so? Well, this is true: all other things being equal, real wages definitely fall with inflation. But if inflation is 10% and my nominal salary also increases by 10%, then the purchasing power of my salary does not change — and therefore I am not affected by inflation.

Certainly, during the time it takes for my wage to match the price increase, my real wage falls even if only temporarily – and so I am worse off for a while. Therefore, I may be negatively affected by inflation after all. We can conclude that the longer wages take to catch up with the rise in consumer prices, the greater the real wage loss. In July, for example, year-on-year inflation was 7.6%, while the average hourly wage increased by only 5.1% – therefore, in real terms, the wage average hours have decreased by approximately 2.5% over the past 12 months.

Of course, if someone’s income – whether from work or any other source – remains constant after a price increase, then that individual will be most affected by the loss of monetary value. But it is rather rare that wages are not adjusted, at least to some extent, during a period of inflation – so, contrary to what many pundits and policymakers want us to believe, it may not be workers who are most affected by the loss of monetary value induced by inflation.

So who are these people on fixed incomes? “Mostly retirees”, we are sometimes told. But is it so? Well not really. The Canada Pension Plan, for example, is adjusted for inflation every January. And most private pension plans are also adjusted for inflation every year. So, no, most retirees do not have fixed nominal incomes and therefore are not the most affected by the loss of value of money.

So who really has fixed nominal incomes? It appears to be mainly money lenders and bondholders.

On the one hand, money lenders giving loans at fixed interest rates have fixed incomes. If there is inflation, the real value of interest—that is, the lender’s income—is reduced. In addition, the real value of the money lent is also reduced, resulting in a capital loss for the lender and a capital gain for the borrower.

On the other hand, bondholders also have fixed incomes since they receive a fixed amount every year – the so-called coupon of the bond. Therefore, if there is inflation, the real coupon value of the bond, i.e. the income of the bondholder, is reduced. Moreover, the real value of the bond is also reduced at the time of maturity, thus resulting in a capital loss for the holder of the bond.

And banks and other financial institutions are the main providers of loans, and they are also the biggest investors in bonds. Therefore, it is the shareholders of banks and other financial institutions — not workers or retirees — who are most affected by the loss in value of money due to inflation.

Therefore, shareholders of banks and other financial institutions benefit the most when the Bank of Canada raises interest rates to curb inflation, but they bear no cost. Rather, it is workers who bear most of the cost in the form of higher unemployment and lower real wages.

At 7.6% in July, there is no doubt that inflation in Canada is still too high. But the implementation of a restrictive monetary policy should not be seen as the solution. Indeed, reducing inflation at the cost of higher unemployment and lower real wages is both unfair and unnecessary. This is unfair because workers are not responsible for the rise in inflation but bear all the costs of reducing it. And that’s unnecessary because the government could instead implement policies directed at the domestic sources of inflation, which are neither excessive demand nor unwarranted wage increases.

Finally, the soft landing allegedly targeted by the Bank of Canada appears to be a chimera. As I wrote in a previous article, using the interest rate to reduce inflation is like using a cannon to kill a mosquito on the wall – it will kill the mosquito, but also destroy the house in the process.

Indeed, the interest rate is a very crude instrument. Therefore, the likely outcome of implementing a restrictive monetary policy to curb inflation will not be a mild slowdown; rather, it will be a deep – and unnecessary – recession.

Gustavo Indart is Professor Emeritus in the Department of Economics at the University of Toronto.