Income inequality has become a major public issue all over the world. Each year the gap
between the rich and poor is rising, and the circumstance has turned to be miserable in
many countries. This paper investigates the impact of inflation on income inequality using
data from the period of 1990 to 2015. The study uses econometric techniques on the time
series data. All data are found to be stationary at first difference by using Augmented
Dickey-Fuller (ADF) test. The results of Johannsen co-integration test confirm that there is
a long-run positive significant relationship among the examined variables. The result
shows that if inflation increases by 1%, income inequality increases by 4.99%. The result of
the vector error correction model (VECM) shows that inequality requires approximately
0.35% of error correction per year and inflation requires 22.74% of error correction per
year to reach equilibrium. The result of the impulse response function indicates that one
standard deviation shock from inequality and inflation causes inequality to rise over time.
When one standard deviation shock is given to inequality causes inflation to decline after
1.5 years then neutralized after 3.5 years where shock from inflation, inflation becomes
negative after two years and neutralized after six years.
