# Step 278: trend inflation and indexed rent

**Why.** The third referee report noted three fixed assumptions. Rent is fixed in nominal terms for
20 years, the nominal wage is fixed, and there is no trend inflation. So "all of the extra harm to
renters comes from deflation" follows from the assumptions. With inflation targeting, a productivity gain
lowers inflation, not the price level.

Generated by `scripts/inflation_v278.py`, with the model in `scripts/closure_model_v278.py` (a copy of
step 276; archived files untouched). Archived in `data/processed/inflation_v278.json`. All 432 distinct
cases, revised specification of step 276 (present-value equity, 15% profit levy when the cap binds).
Illustrative; not a forecast.

## Options

- **Trend inflation.** Every nominal flow of the macro rows, and the price index, grows by
  (1 + inflation)^t. Real outcomes change only through nominal contracts: rent, mortgages, the consumer
  loan, bonds and cash.
- **Fisher.** By default, the government bond rate and the overdraft rate rise with inflation, because
  new borrowing is priced for it. Existing private contracts stay nominal.
- **Rent indexation.** Rent follows the goods price level with elasticity 0.5 or 1.
- **House prices and maintenance** follow the goods price level whenever inflation or rent indexation is
  on.

With the defaults, the model reproduces step 276 exactly (tested). Money is conserved.

## Results

| Variant | Preserved (of 432) | Price level at year 20, full pass-through | Full pass-through: renters / outright owners / fixed / reset mortgage |
|---|---:|---:|---|
| No inflation, nominal rent (step 276) | 277 | 0.80 | 11 / 17 of 24; 24 / 21 of 48 |
| 2% inflation (Fisher) | 308 | 1.19 | 15 / 16 of 24; 34 / 28 of 48 |
| 2% inflation, interest rates unchanged | 345 | 1.19 | 17 / 17 of 24; 40 / 33 of 48 |
| Rent half indexed, no inflation | 289 | 0.80 | 16 / 17 of 24; 28 / 24 of 48 |
| Rent fully indexed, no inflation | 290 | 0.80 | 17 / 17 of 24; 28 / 24 of 48 |
| 2% inflation, rent half indexed | 308 | 1.19 | 15 / 16 of 24; 34 / 28 of 48 |

With no pass-through, renters and outright owners are preserved equally in every variant (18–19 of 24).

## What it shows

- **The renters' penalty is conditional.** It appears only when the price level actually falls and
  rent does not.
  - With 2% trend inflation, full pass-through lowers inflation instead of prices. Renters are then
    preserved almost as often as outright owners (15 against 16).
  - With rent indexed to prices, they are preserved equally (17 against 17).
  - In the thesis this becomes a conditional sensitivity, not a headline.
- **Mortgage holders keep part of the penalty.** A fixed mortgage stays nominal, and under deflation it
  is still heavier: 24 of 48 preserved, against 34 with inflation.
- **Inflation helps overall** (277 → 308), because nominal debt, public and private, is eroded. If
  interest rates do not follow inflation, the erosion is larger (345), but that is a transfer from bond
  holders that a central bank and markets would not leave in place for 20 years.