The redistribution of wealth in inflation

The paper presents formulation of the debtor-creditor hypothesis of redistribution of wealth in inflation. A portfolio model is used to derive an expression for the change in real rate of return measuring inflation gain or loss. The situation is relevant when the market rates of return fail fully to respond to expectations or when the inflation rate is not fully predictable. Of the wealth transfers from the private sector to the government in inflation, the model only covers the case of inflation tax. The model is employed to consider the controversial issue of inventory gains in inflation. The conclusion is that neither LIFO or FIFO can be regarded as having general validity as inventory accounting method in inflation.