There are numerous contributions to the literature on the relationship between various government intervention schemes and the rate of inflation. However, it seems that the policy of direct price support to consumer goods has not been analyzed in the professional literature, despite the fact that such policies are proposed in various countries in conjunction with anti-inflationary measures. For example, the British government proposed in July 1975 to increase food subsidies, among other measures to attrack inflation.

Economists seem to be aware of the questionable value of subsidies in the fight against inflation. Subsidies have to be financed by the government, and therefore they may cause larger deficits, thus contributing to the inflationary process. On the other hand, subsidies may affect income distribution in favor of certains groups, and be of political value.

We undertake a rigorous analysis of consumption subsidies and their relation to inflation and income distribution. The model employed for this purpose is Samuelson’s overlapping generations model (Samuelson, [1958]), in its simplest form. There is just one good, and fiat money; inflation is measured by the change of the money price of the consumption good from period to period.