How does inflation exacerbate income inequality?

Inflation exacerbates income inequality by eroding the purchasing power of lower-income households more than higher-income ones.

Inflation refers to the general increase in prices over time. When inflation rates are high, the value of money decreases, meaning that the same amount of money can buy fewer goods and services. This erosion of purchasing power can disproportionately affect lower-income households, exacerbating income inequality.

Lower-income households typically spend a larger proportion of their income on necessities such as food, housing, and utilities. When prices rise due to inflation, these households may struggle to afford these basic needs. In contrast, higher-income households have more disposable income and are better able to absorb the increased costs. They may even benefit from inflation if they own assets such as property or stocks, which often increase in value with inflation.

Moreover, lower-income households are less likely to have savings or investments that could provide a buffer against inflation. They are also less likely to have access to credit, which could be used to smooth consumption over time. This lack of financial flexibility can make it harder for lower-income households to cope with inflation, further widening the income gap.

Inflation can also exacerbate income inequality through its impact on wages. In theory, wages should increase with inflation to maintain workers' purchasing power. However, in practice, this is often not the case. Lower-income workers, in particular, may have less bargaining power and may be less able to secure wage increases that keep pace with inflation. This can lead to a real decrease in their income, increasing income inequality.

Finally, inflation can exacerbate income inequality through its impact on interest rates. When inflation is high, central banks often raise interest rates to try to control it. This can benefit those with savings, as they earn more interest. However, it can hurt those with debts, as their interest payments increase. Since lower-income households are more likely to have debts and less likely to have savings, they can be disproportionately affected by these interest rate changes.

In conclusion, inflation can exacerbate income inequality in several ways. It can erode the purchasing power of lower-income households, make it harder for them to cope with increased costs, decrease their real income, and increase their interest payments.