Monetary policy shocks and inflation inequality

This paper studies how monetary policy shocks influence the distribution of U.S. household-level inflation rates. We find that contractionary monetary policy shocks significantly and persistently decrease inflation dispersion in the economy. Moreover, different demographic groups are affected heterogeneously by monetary policy. Due to the different consumption baskets purchased, low- and middle-income households experience higher median inflation rates, which are at the same time more responsive to a contractionary monetary shock, leading to an overall convergence of inflation rates across income groups. The same result holds for expenditure and salary groups. The expenditures on energy, water and gasoline are the main drivers behind these results. These findings imply that the impact of monetary policy shocks on expenditure inequality is between 20% and 30% more muted once we control for differences in individual inflation rates. Overall, our empirical evidence highlights the importance of inflation heterogeneity in studying the distributional consequences that monetary policies can have.