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Who is most affected by inflation? Consider the source

Key Takeaways

  • The impact of inflation depends on what’s causing it.
  • Inflationary oil supply shocks tend to hurt the least affluent by more than the most affluent.
  • Inflationary monetary shocks do the opposite: They hurt the most affluent more than the least affluent.
  • This discrepancy is largely driven by the different response of asset prices: Monetary policy raises home and stock prices, which hurts those buying houses, while oil shocks do the opposite.

For the first time in years, inflation has surged across the world. In the U.S. and Europe, consumer prices grew in 2022 by almost 9 percent after years of inflation rates around 2 percent or less.[1] This surge has reignited interest in a longstanding question: Who is most hurt by increasing prices?

There are two reasons why this seemingly simple question may be difficult to answer.

First, inflation can arise from different sources. For instance, conventional wisdom says the inflation spike during the 1970s was caused by a rapid increase in the price of oil—an aggregate supply contraction. The subsequent disinflation during the 1980s is often attributed to hawkish monetary policy and specifically Paul Volcker’s decision to rapidly raise nominal interest rates—an aggregate demand shock. Inflationary episodes driven by aggregate supply and aggregate demand shocks need not produce the same winners and losers. A monetary expansion may be extremely different from an oil supply contraction, for instance.

The second challenge is that the drivers of inflation affect more than just prices of goods and services. Both oil supply and monetary policy also affect unemployment, wages, and asset prices, which likely affect different households quite differently. It may be important, therefore, to consider movements in both prices and income when assessing whether inflation differentially affects the most or least affluent.

Why might inflation affect different households differently?

The classic view in macroeconomics is that inflation transfers resources from so-called net nominal savers to net nominal borrowers. To understand this, suppose that Alice lent Bob $100 at an interest rate of 5 percent. Bob then needs to pay Alice back $105 the next year. Bob is a nominal borrower and Alice is a nominal saver. If prices do not rise over the course of this year, then Bob’s repayment is worth 5 percent more goods and services than the amount he borrowed. However, if prices rise by 10 percent over this year, then Bob’s repayment buys fewer goods and services than his original $100 debt allowed him to purchase. In this sense, the inflation has made Bob richer and Alice poorer.

Doepke and Schneider (2006) studied the scale of this redistribution and found that the main losers from inflation are old, rich households—the major bondholders in the economy. In contrast, young, middle-class households are the largest winners from inflation in the U.S., because the real value of their substantial fixed-rate mortgage debt is eroded by inflation.[2] Focusing solely on this channel, inflation has often been considered to be a progressive force—it transfers resources from the wealthiest to borrowers.

This logic also holds for governments, firms, and foreigners. Since the U.S. government issues nominal bonds (i.e., borrows) to finance deficit spending, inflation reduces the real value of what they owe. Much of U.S. government debt is held by foreigners and rich Americans, so this is a force for inflation to redistribute real resources from foreigners and rich Americans to the U.S. government.

Of course, this is just one way in which inflation affects households. Most directly, inflation affects the price of goods and services that households purchase. If inflation tends to disproportionately affect the prices of goods that the least well-off households consume, then inflation could in principle be regressive. As a concrete example: If aggregate inflationary periods are accompanied by spikes in the prices of gasoline, households that spend a larger share of their income on fuel— which are largely less affluent households—will be more affected by inflation.

Finally, household income may also respond to inflation. Wages are often annually adjusted to keep up with inflation, while Social Security benefits are usually indexed to inflation. These movements in income will naturally offset whatever pain you suffer from paying higher prices. As an extreme example, if prices rise by 2 percent and household income also rises by 2 percent, the inflation will have no real effect, as households will be able to afford exactly as many goods and services as they could without the inflation.

Who is most affected by inflationary shocks?

To properly assess the winners and losers from inflation, one needs to consider all of these effects —on prices, income, and wealth—on one scale. This is the goal of a recent paper I wrote with colleagues (del Canto et al., 2023). We write down a simple economic theory of a household choosing consumption of a variety of goods, supplying labor, and investing in a number of assets.

We then consider how the household’s well-being changes when some shock affects the prices the household faces. This exercise shows that the impact of this shock on household well-being is summarized by a simple statistic: Did the price of the goods that the household consumes go up by more than its income in present value terms?

Assessing the effect of inflationary shocks on household well-being therefore requires two inputs. First, one needs estimates of the effect of the shock on the prices of a variety of goods and assets, as well as its effects on income. Fortunately, there is a large existing toolbox of techniques precisely designed to estimate such effects.

Second, one needs to measure consumption of a variety of goods by households, the assets they invest in, and the salaries they receive. Such measures can be produced from a variety of cross-sectional surveys, such as the Consumer Expenditure Survey, the Survey of Consumer Finances, and the Current Population Survey.

Our paper studies the distributional effects of two major drivers of short-run inflation fluctuations—oil supply and monetary policy shocks. We estimate the impact of these shocks using a standard Structural Vector Autoregression (SVAR) approach, where we isolate surprises in oil supply (monetary policy) using high-frequency movements in oil prices (treasury yields) around OPEC supply announcements (FOMC meetings).

Figure 1 shows the total losses to various households arising from inflations tied to a 10 percent increase in the price of oil (Panel A) and a 25 basis point cut in nominal interest rates (Panel B). The horizontal axis plots the age of the household head, while the three lines indicate three education groups—high school or less (dark blue), some college (light blue), or at least a bachelor’s degree (red).

Figure 1 – Welfare Losses from Inflationary Shocks

Panel A: Expansionary Monetary Policy Shock
Panel A: Expansionary Monetary Policy Shock
Panel B: Contractionary Oil Supply Shocks
Panel B: Contractionary Oil Supply Shocks

Figure 1 shows that inflationary monetary and oil supply shocks have vastly different distributional consequences. This is despite both shocks being scaled so that they generate the same aggregate inflation. The figure shows that when inflation is driven by the Fed unexpectedly cutting interest rates, young and middle-aged college-educated households lose the most, while older and less-educated households are largely unaffected or even benefit.

This is in sharp contrast with what happens when inflation is driven by a jump in oil prices. Such inflations lead to welfare losses, which are largest for younger, less-educated households and for retirement-age college-educated households. Meanwhile, young and middle-aged college-educated households actually benefit from the inflationary oil shock. Quantitatively, a 10 percent jump in oil prices means less-educated households must be paid around 0.5 percent of their quarterly consumption to afford their no-shock choices, while college-educated households would be willing to pay up to 0.25 percent of quarterly consumption to have the shock.

Figure 2 – Channels of Welfare Losses

Panel A: Expansionary Monetary Policy Shock
Panel A: Expansionary Monetary Policy Shock
Panel B: Contractionary Oil Supply Shocks
Panel B: Contractionary Oil Supply Shocks

What drives these patterns? Figure 2 decomposes the welfare losses into components coming from consumption prices, movements in labor income, movements from asset prices and dividends, and shifts in government transfer income such as Social Security benefits. Panel A presents the effects arising from an inflationary monetary policy shock. The top left figure shows that all households are about equally hurt from rising prices of consumption after a monetary shock. This is ultimately because differences in consumption bundles across households are small: Even though gas prices do rise more than the price of, say, clothes after a monetary inflation, motor fuel occupies a similar share—around 4 to 6 percent—of consumption for all household groups.

Paychecks, likewise, are not the primary driver of the distributional consequences of monetary inflation—all three education groups see similar increases in pay (and thus negative losses) from monetary expansions, though the gains are perhaps slightly larger for the least educated. Labor income increases nearly exactly offset the losses households see from increased expenditures. The exception is for older non-working households, which do not see changes in earnings. These households, however, see increases in their transfer income—specifically, Social Security benefits— which offset the price increases.

Monetary inflations therefore principally have distributional effects because of differences in households’ asset portfolio decisions. This can be seen by the fact that the portfolio channel in the bottom left mirrors the total welfare effect from Figure 1. Monetary policy has a couple of key effects on asset prices.

A cut in interest rates pushes up the stock market and house prices. These higher prices benefit households that are selling stocks and houses, but hurt those buying stocks and houses. Younger college-educated households are precisely those that buy houses and equities.

Meanwhile, older households that may be selling assets from their retirement accounts or downsizing their home benefit from these high asset prices. These effects are partially offset by a decline in mortgage rates and the fact that dividends on the S&P500 fall, which hurts older households holding a lot of equities. However, these dividend and mortgage rate effects turn out to be smaller than the effect from asset accumulation.[3]

Compared to monetary shocks, inflationary oil shocks have an almost opposite impact.  First, oil price spikes are slightly more regressive on the consumption price side, mostly because oil price spikes have big impacts on the price of motor fuel and utilities, both of which occupy a larger share of less-educated households’ consumption. Labor income falls after a contractionary oil shock, as unemployment rates rise, but transfer income—which is largely indexed to inflation—still rises for older households.

But the major difference between monetary and oil shocks arises because of their different effects on asset prices. Oil shocks tend to hurt the stock market and have limited effects on mortgage rates or housing markets. This generates a portfolio effect on households that is the opposite to that of a monetary inflation. This is the major reason inflationary oil shocks are regressive while monetary inflations are progressive.

Policy considerations

Inflations driven by oil supply and monetary shocks have historically had opposite distributional consequences—oil supply shocks most hurt the least affluent while inflationary monetary policy most hurts the most affluent. An implication of this is that disinflationary monetary shocks—an increase in interest rates—likely have the same distributional consequences as inflationary oil shocks. This could present a challenge for policymakers: If the Fed responds to inflation driven by reductions in global oil supply by raising interest rates, that could exacerbate the regressivity of the initial oil shock. It should be noted that this conclusion requires some more research since we are only able to estimate the effects of a surprise monetary shock rather than an anticipated policy rule. Regardless, there is no simple answer to the question: “Is inflation regressive?”

About the Author

John Grigsby is a Visiting Fellow at SIEPR. He is an Assistant Professor in the Department of Economics and School of Public and International Affairs at Princeton University. He is an empirical macroeconomist studying a broad set of questions related to wage and unemployment dynamics, the drivers of historical innovation, the functioning of mortgage markets and the distributional consequences of inflation.


[1] Consumer Price Index for All Urban Consumers: All Items in U.S. City Average and Inflation, consumer prices for the Euro Area

[2] This conclusion would be different in countries where most mortgage debt is subject to an adjustable interest rate, as is the case in many European countries and the UK.

[3] Note that all monetary effects are estimated based on surprises to the policy rate and should not be interpreted as the effects of changing the policy rule.


[1] del Canto, Felipe, John Grigsby, Eric Qian, and Conor Walsh. “Are Inflationary Shocks Regressive? A Feasible Set Approach.” NBER Working Paper #31124 (2023).

[2] Doepke, Matthias, and Martin Schneider. “Inflation and the Redistribution of Nominal Wealth.” Journal of Political Economy (2006). 114(6).

John Grigsby
Publication Date
March, 2024