Question

How can inflation affect the distribution of income? Please briefly explain.

Answer 1

A central bank, like the U.S. Federal Reserve banking system, when the central government issues bonds and the central bank purchases them, introduces new money into circulation. This process causes inflation of the money supply, and the introduction of new money continues as long as the government continues to issue bonds and the central bank keeps buying them up.

It also impacts sales as inflation happens. The effect on income can vary depending on those industries which have the most effect on inflation. If a person's income rises faster than the rate of inflation, income growth still exists in real terms; if a person's income rises at the same rate as inflation, there is no actual increase; and if a person's income lags behind inflation, then goods appear more expensive in the economy and there is a loss of income in real terms.

This impact on income also affects the income distribution, which in turn affects living standards. Those with well-paid jobs or incomes that surpass inflation earn more income than those who only keep up with inflation, and those whose incomes keep up with inflation receive income that is not earned by those with incomes that lag behind inflation. It causes substantial income distribution inequality, as even prosperous people will see a decline in their standard of living if they do not obtain an rise in income that is at least in line with inflation.