Welfare Costs of Inflation: Evidence from China

In this paper, we use the China General Social Survey 2010 data to estimate the impact of inflation on the welfare of residents. By using the happiness research approach, we find that on average, a 0.1 % rise in inflation rate will cause a welfare loss of about 73.0–164.1 RMB, mainly from unexpected inflation. Furthermore, welfare costs to different income groups vary significantly: for those whose household income reaches 100,000 RMB, the welfare loss resulted from a 0.1 % rise in inflation only reduces about 0.057 % of their income, while for the below 10 thousand income group, the cost is as high as 0.739 %. It also shows that there are substantial differences in different income groups’ sensitivities to different kinds of commodities. Specifically, low-income residents are seriously harmed by an increase in food and residence prices, whereas their middle-income counterparts are mainly affected by price changes in healthcare, personal articles, transportation, communication, recreation, and education. Besides, we find that subjective well-being of debtors are significantly boosted by inflation.