Horacio A. Aguirre (Central Bank of Argentina) - The Distributional Impact of Inflation: Tax Incidence and Financial Strategies of Households

BOFIT-seminarier

BOFIT Seminar - Horacio A. Aguirre (Central Bank of Argentina) - The Distributional Impact of Inflation: Tax Incidence and Financial Strategies of Households

Co-authors Federico Grillo (Central Bank of Argentina) and Matías Orgoñez (Central Bank of Argentina) 

Abstract
We examine different channels through which inflation weighs on income distribution, and how households adapt financial strategies in response. We provide new estimates of the incidence of the inflation tax by income quintile of households’ income for 2017-2024, estimating money demand functions using micro data from Argentina’s latest national survey of household expenditure. We explore how inflation tax incidence may be related to households' financial strategies, particularly decisions on indebtedness, employing quarterly data from Argentina’s permanent household survey. Our results show that inflation tax incidence on low-income households rises from around 1% to 8% of income as monthly inflation accelerates from 2% in the first quarter of 2017 to 25% in late 2023 and that such incidence triples that of higher income households. Lower inflation during 2024 involved gains of around 6 p.p. of income for first-quintile households and of 1,5 p.p. for fifth-quintile households. We find that poorer households tend to react to the inflation tax by borrowing from family members or friends, while better-off households can access financial services that allow them to pay in instalments, thus shielding against inflation. In-family borrowing becomes more significant as inflation accelerates. We find little evidence to link inflation tax incidence to bank borrowing or use of savings to finance current spending.

 

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