On BlueSky, #DanDavies asked

"ok then if we have a vibrant and intelligent EconSky community riddle me this: what would the microfoundations be for 'voters dislike inflation much more than they dislike unemployment, even in a rising real wage environment with strong asset values'? what preferences would make that true?"

I posted the following thread in response. https://bsky.app/profile/dsquareddigest.bsky.social/post/3lar3zczumc27

great thread you’ve provoked! i think the obvious answer is still the best, inflation affects everyone, unemployment a relative few. the exit poll demographic counter is weak. the biggest electoral factor was low D turnout, rather than share within demographics. 1/

there are Simpson’s Paradox issues as well. some demographics may have high unemployment risk overall, but greater segmentation between the precariously and securely employed. if so, such a demographic would prefer on average increased unemployment. 2/

others have mentioned volatility. inflation brings several volatilities. 3/

for each worker, inflation occurs continuously, wage gains match discretely. so there are periods of real losses, matched by periods of anticipatory real gains. the two are symmetrical, but under diminishing utility of real wages the net is a loss. 4/

higher overall inflation corresponds to higher relative variability of individual prices. which requires agile substitution of shifting consumption bundles. in simple consumer theory this is costless. in real life it’s obviously not. 5/

this is fun to think about, because it brings portfolio theory into consumer theory. say in Period 1 relative prices suggest it’s worth investing in an induction stove, but under Period 2 prices you just would have chosen to eat out. 6/

you may still eat in, given the forward looking costs, but you’ve suffered an investment loss in either case. this kind of cost grows with inflation even if real wages perfectly match. 7/

as @guan points out, it’s not mere money illusion, the “i earned my raises but then inflation snatched it” story. raises require enduring conflict costs. if we bring in common behavioral ideas, reference points, endowment effects, the snatches may hurt more than raises help. /fin