What Is The Cantillon Effect?

The Cantillon Effect refers to the uneven impact of inflation on different economic sectors and individuals due to how and where new money is introduced. Initially, as new fiat money enters an economy, it is typically given to specific entities like banks. These initial recipients, being closer to the source of the new money (e.g., central banks), benefit as they can spend it before the general rise in prices. As this money circulates further, prices adjust, leading to later recipients facing higher prices. This process redistributes wealth and purchasing power, often benefiting those closer to financial institutions at the expense of ordinary citizens. The effect implies that inflation can act as a hidden tax, disproportionately affecting different parts of the population. Richard Cantillon, an 18th-century Irish-French economist, first observed this phenomenon, highlighting the importance of money's velocity and distribution in influencing market prices.