Examining the impact of inflation on income inequality with panel data analysis

Quantitative works on the income inequality place special emphasis upon Simon Kuznets that review the relationship between income inequality and economic growth as well as upon the Kuznets curve hypothesis that argues this relationship is in form of reverse-U. This hypothesis suggests that income inequality will deteriorate as economic growth rate increases to a certain level from where it will start to decline. Kuznets, by this work, leads the way for consideration of other elements that affect income inequality. Contemporary works consider economic growth as one of the main variables but also consider other elements in terms of their impact upon income inequality. Inflation is one of such elements. Initially, general conviction suggested that inflation, causing disruption in price stability and other economic issues, should deteriorate income inequality. This conviction was based on the premise that inflation reduces the purchasing power of the poor segments of the society, thus reinforcing the sense of injustice. However, the mechanism that explains the linkage between income inequality and inflation is not all about this. The possibility of other different channels that might lead to a different outlook of this relationship should also be taken into consideration. This study empirically analyzes the relationship between inflation and income inequality and determines the channels through which inflation redistributes income by focusing on 35 countries (17 developed nations for the period of 1991-2016, and 18 developing nations for the period of 1991-2015) and by utilizing the panel data analysis as research method. Findings based on the fixed and random effects model suggest that there is negative-direction correlation between income inequality and inflation in both developed and developing nations. This means that inflation reduces the level of income inequality in both groups of countries. Additionally, the argument that the correlation between income inequality and economic growth is in form of reverse-U has been confirmed in both cases. Keywords: Income Distribution Inequality, Kuznets Curve Hypothesis, Inflation, Panel Data Analysis