Inflation–inequality puzzle: is it still apparent?

Abstract

PurposeThe primary focus of this study is to examine the distributional consequences of the widespread increase in prices. The fundamental question the study aims to address is whether the dynamics of income distribution due to higher inflation differ in the short term compared to the long run.Design/methodology/approachThe authors estimated a panel-data model (fixed effects) using inequality and inflation data available at a high frequency, i.e. on a quarterly basis for over 30 years, and found evidence that inflation causes rapid swings in income distribution.Findings The authors’ contribution to the literature lies in providing evidence that inflation rapidly causes swings in income distribution, even after controlling for the state of the economy. The authors also demonstrate that the magnitude and direction of the effect of inflation on income inequality depend on whether the initial inflation rate is below or above the Federal Reserve’s target of 2%.Originality/valueTo the best of the authors’ knowledge, the authors are the first to emphasize that the targets set by central banks can drive the strength and direction of the relationship between inflation and income inequality.