Inflation News and the Poor: The Role of Ethnic Heterogeneity

Abstract

A sudden and unexpected increase in prices may erode real incomes of both the rich and the poor. However, the poor are often more unprotected against sudden inflation spells. I show that the notion that the poor are hurt more than the rich by unexpected price increases crucially depends on the ethnic composition of populations. While the poor lose income shares during unexpected inflation episodes in ethnically fractionalized countries, they gain income shares relative to the rich during unexpected inflation spells in more homogenous populations. To document this new empirical regularity, I construct a novel data set of inflation news shocks based on revisions to inflation forecasts in the IMFs World Economic Outlook for the period 1991-2016 across 189 countries. The results suggests that social insurance for the poor against unanticipated inflation is weaker in ethnically heterogeneous populations than in more homogenous populations.

Keywords: inequality, inflation, ethnic heterogeneity, social insurance

JEL Classification: E31, D31, O1, O15