All in all, recent studies suggest that a higher inflation rate is accompanied by greater income inequality.11 At the same time research on the US data finds that also contractionary monetary policy actions appear to increase inequality in earnings and total income.12 A stability-oriented monetary policy, which aims to smooth the cycle and reduce its amplitude, ought therefore to cushion the impact of negative shocks on poorer households.
However, it is not only the extent of income and wealth shocks that affects consumers’ welfare, but also the fluctuation in their consumption expenditure. All households are not equal in this respect. Some of them are able to insure against wealth shocks and can thus mitigate the adverse consequences of such shocks for their well-being.