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Blame American inequality on inflation

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Al Behrman / AP / File

(Read caption) Lynne Curtiss places groceries in her car after shopping, in Cincinnati. Guest blogger Stefan Karlsson writes that when inflationary monetary policy causes food and energy prices to soar, people with lower incomes are affected most.

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I have long argued that while it is not the only factor (immigration for example has also played a role), inflationary monetary policy has been the most important reason why inequality in America has increased so much.

The two main reasons for this are:

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1) Because wages/salaries are less flexible than most prices, inflation will lower real wages and increase corporate profits. This will increase inequality because the rich own a far higher proportion of stocks than they receive of labor income.

2) Inflationary policies tend to raise stock prices relative to profits, something that will raise inequality for the same reason as the relative increase in profits.

This article (Ironically from the institution that produces inflation) points to a third mechanism in which inflationary policy will increase: namely the fact that people with low income spends a higher proportion of their income on food and energy than people with high income, meaning that the relative real income of the poor will fall when inflationary policies causes food and energy prices to soar.

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