Differential Inflationary Pressures on Low‐ and High‐Income Groups: Individuals, Firms, and Rising Inequality

ABSTRACT We study the implications of inflation heterogeneity for individuals and firms through the lens of accounting research, applying measurement frameworks to the national accounting measurement of inflation. We first examine the systematic exposure of individuals in low‐income households to higher inflation relative to those in high‐income households. We show that this “inflation gap” is linked with future rising inequality in the form of widening gaps in healthcare insurance, education, homeownership, and credit card debt, as well as in a higher frequency of property crimes. We also provide an economic mechanism connecting the inflation gap with rising inequality, empirically demonstrating the role of basic goods in reducing the ability of individuals in the low‐income group to attain the social and economic implications that we study. In addition, we show a channel that connects the inflation gap to firms' profitability. Indeed, consistent with the inflation gap disadvantaging low‐income households mainly through basic goods, the inflation gap fluctuations are especially strongly connected to the profitability of firms operating in the energy and consumer staples sectors. Finally, we find that market power plays a role in this connection, where this link is even stronger for firms with high market power. Taking its findings together, the paper shows that differential inflation pressures have major implications for household well‐being and corporate profitability.