Inflation news and the poor: The role of ethnic heterogeneity

Incomes are more unequally distributed in ethnically diverse populations than in more homogenous ones. In this paper, I help explain this pattern by showing that unanticipated inflation reduces the income share of the poor in ethnically fractionalized countries, while increasing it in ethnically homogenous populations. I propose a mechanism to explain the result, where inflation-hedging among the rich is more prevalent in ethnically fractionalized countries because inflation is more volatile. To identify episodes of unanticipated price increases, I construct a novel data set of inflation shocks across 189 countries, using the revisions to the inflation forecasts in IMFs World Economic outlook between spring and fall reports.