Distributional effects of inflation

This study examines the distributional effects of inflation on household consumption in Peru. Household-specific inflation rates are estimated using microdata from the National Household Survey. Employing a difference-in-differences framework and an event-study analysis, the paper identifies the causal impact of high inflation on per capita household expenditure, distinguishing across income levels and degrees of exposure to inflationary shocks. The results indicate that high inflation has contractionary and regressive effects on consumption: lower-income households experienced significant reductions of up to 8,6%, whereas higher-income households were better able to mitigate these effects. Furthermore, using a consumption model grounded in the permanent income hypothesis, the study shows that higher-income households exhibit a greater marginal propensity to consume permanent income relative to transitory income, reflecting their capacity to smooth consumption during inflationary periods. In contrast, lower-income households are unable to stabilize consumption in response to rising prices.