The Great Reversal of Inflation Inequality Open Access

Abstract

This study finds that there was a reversal of inflation inequality during the Covid-19

pandemic. From 2012 to 2021, inflation varied inversely with income US households. In mid-

2021, amidst the recent inflationary period, this trend reversed and the lowest income group

experienced the lowest inflation rate of any income quintile. Key drivers of this disruption

were spending on leisure and travel goods such as rental vehicles and lodging away from home

which drove up inflation for high income households. Using an intertemporal optimization

model, this study shows that the reversal of inflation inequality stemmed from the interaction

between lockdown constraints on luxury services during the pandemic and non-homothetic

preferences for normal consumption as well as luxury services. Lockdown constraints created

deferred demand for luxury services among high-income households and spurred a heightened

propensity to consume luxury services in the post-pandemic period, contributing to a reversal

of inflation inequality.

Table of Contents

1 Introduction 1

1.1 Motivation and Research Question 1

2 Literature Review 3

3 Empirical Strategy 8

3.1 Hypotheses

3.2 Empirical Methodology 9

3.3 Data and Variables 10

4 Empirical Results 12

4.1 Differences in Inflation Rates Experienced by Various Income Quintiles 12

4.2 What Expenditure Patterns Lead to Differences in Inflation Across Income Quintiles? 15

5 Theoretical Explanation 19

5.1 Model Environment 19

5.2 Normal Period 20

5.3 Pandemic Period 23

6 Discussion: Policy Implications 26

7 Conclusion 27

8 Appendix 29

8.1 Figures 29

8.2 Derivation of Equation 6 Using Partial Derivatives 29

8.3 Derivation of Equation 7 and 17 using Lagrangian Optimization 31

8.4 Appendix of all equations used in main body text 34

About this Honors Thesis

Rights statement

• Permission granted by the author to include this thesis or dissertation in this repository. All rights reserved by the author. Please contact the author for information regarding the reproduction and use of this thesis or dissertation.

School	Emory College
Department	Economics
Degree	B.A.
Submission	Honors Thesis
Language	English
Research Field	Economics, Theory Economics, General
Keyword	intertemporal utility optimization monetary policy inflation income inequality inequality
Committee Chair / Thesis Advisor	Kaiji Chen, Emory University
Committee Members	Sarah Higinbotham, Emory University Hashem Dezhbakhsh, Emory University

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