9 Absent a background of a steady and predictable inflation rate, the purchasing power of retirement income streams and other payments may turn out to be very different from what was envisioned when they were originally arranged. One long-standing effect of inflation is that it creates incentives that would not otherwise be present to economize on low-interest-bearing money balances.
More broadly, an inflationary environment may distort portfolio decisions. 7 Ultimately, nominal wage contracts will adjust to reflect a higher longer-run inflation rate. In the short run, however, it has been a long-standing feature of the U.S. economy that nominal wages tend to lag developments in prices; see, for example, Mitchell (1913) and Barattieri, Basu, and Gottschalk (2014).