The heterogeneous impact of inflation on households' balance sheets

Summary

Focus

Inflation may affect everyone but it does not affect everyone in the same way. Differences in wealth composition, salary or consumption patterns may lead to quite different outcomes for different individuals. The aim of this paper is to cast some light on the different channels through which inflation affects wealth inequality.

Contribution

We study three key channels that shape how inflation affects wealth inequality: (i) a wealth channel through which inflation redistributes from lenders to borrowers; (ii) an income channel through which inflation reduces the real value of sticky wages and benefits; and (iii) a consumption channel through which heterogeneous increases in the price of different goods affect people differently depending on their consumption baskets.

We quantify these channels during the 2021 inflation surge in Spain using client-level data from one of the main Spanish commercial banks.

Findings

We show that the wealth and income channels are one order of magnitude larger than the consumption channel. Middle-aged individuals were largely unaffected by inflation as they are typically nominal borrowers due to mortgages. Older individuals suffered the most as their pensions, deposits and cash savings lost value.

Abstract

We identify and study analytically three key channels that shape how inflation affects wealth inequality: (i) the traditional wealth (Fisher) channel through which inflation redistributes from lenders to borrowers; (ii) an income channel through which inflation reduces the real value of sticky wages and benefits; and (iii) a relative consumption channel through which heterogeneous increases in the price of different goods affect people differently depending on their consumption baskets. We then quantify these channels during the 2021 inflation surge in Spain using detailed and high-frequency client-level data from one of the main commercial banks. The unexpected nature and temporary perception of the inflation shock in this particular period closely maps on to the assumptions behind our theoretical decomposition. Results show that the wealth and income channels are one order of magnitude larger than the consumption channel. Middle-aged individuals were largely unaffected by inflation, while older ones suffered the most. We find similar results when using representative surveys on households' wealth, income, and consumption.

JEL classification: G51, D31, E31

Keywords: inflation inequality, net nominal positions, nominal wage rigidities