Inflation Inequality Across Household Income Groups in Brazil: Persistence, Trend and Volatility

ABSTRACT

This article investigates inflation inequality across four income strata in Brazil (very low, low, middle, and high income) from July 2006 to April 2025, using the Headline IPCA as a benchmark. We test the hypothesis that inflation dynamics and transmission mechanisms are structurally unequal and disproportionately affect lower‐income households. The methodology employs a Univariate Unobserved Components model with Stochastic Volatility and Outlier Adjustment (UCSVO) to analyze trend and volatility, followed by a Time‐Varying Parameter (TVP) Phillips Curve to assess persistence and macroeconomic sensitivity. Results indicate that: (i) trend inflation is consistently higher and more volatile among lower‐income groups; (ii) inflation outliers are more frequent and intense for these cohorts; (iii) inflation persistence ranges from 0.20 to 0.40, being particularly unstable at the extremes of the income distribution; and (iv) transmission mechanisms are highly asymmetric, with inflation expectations being significant exclusively for the high‐income group, while the output gap has influenced lower‐income strata since 2008, well before its 2020 impact on the headline IPCA. This indicates that monetary policy targets may be structurally delayed for the most vulnerable, demonstrating that relying solely on aggregate indices introduces systemic policy lags. Ultimately, these findings reveal that a unified monetary intervention can inadvertently deepen socioeconomic divides by failing to address the highly inertial and exposed price dynamics of lower‐income strata.