The Heterogeneous Impact of Inflation on Households’ Balance Sheets

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.

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

JEL Classification: G51, D31, E31