Redistribution through inflation: A multi-sector approach to income dynamics

This paper examines how inflation affects income redistribution within the economy – considering household heterogeneity in terms of income sources, debt levels and consumption preferences – by employing an agent-based stock-flow consistent (AB-SFC) macroeconomic model. In particular, we investigate the consequences of an increase in firms’ intermediate costs on income inequality and key macroeconomic and financial variables. Four channels through which an increase in price affects functional and inter-personal distribution are explored: (i) the inflation inequality channel, (ii) the profit–wage channel, (iii) the macroeconomic activity channel, and (iv) the indebtedness channel. Rising inflation dampens overall economic performance, resulting in increased unemployment, higher prices, and higher income inequality. Our analysis also indicates that rising household debt, driven by the indebtedness channel and resulting from efforts to maintain consumption, poses risks to financial stability. Furthermore, we find that, in the context of market concentration, the markup of systemically significant sectors serves as a primary conduit for redistribution in response to inflationary pressures. This ultimately influences the extent of unemployment, the persistence of inflationary trends, and the magnitude of redistribution.