March 28, 2024 10:34 AM
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Opinion: Inflation Is Even Higher for the Poor – Inside Sources

No one now disputes that inflation is unacceptably high. But our discourse around official measures of inflation, like the Consumer Price Index and the Personal Consumption Expenditures Price Index, revolve around how higher prices affect the typical consumer. Among lower earners, the effect of inflation is significantly worse — even in environments when official measures of inflation seem modest.

The regressive nature of inflation is surprisingly poorly studied, but a small but growing group of economists is starting to focus on it. Unfortunately, federal agencies that compile inflation statistics, like the Bureau of Labor Statistics and the Bureau of Economic Analysis, don’t directly report inflation by income. As Austan Goolsbee, who headed the Council of Economic Advisers under President Barack Obama, has explained, the government “has the data” to break out inflation rates by income groups, “but it doesn’t.”

When it comes to inflation, lower earners are disproportionately affected by two factors: differences in the mix, or “basket,” of things they consume relative to high earners; and, most important, the higher proportion of low earners’ income spent on the cost of living, relative to high earners.

For example, housing and food represent 57 percent of the consumption of people in the bottom income quintile, vs. 43 percent for those in the top quintile. As a result, the rise in housing and food prices disproportionately affects the poor, especially as inflation compounds over time. By contrast, those in the top quintile spend 17 percent of their income on pensions and non-health insurance products, like life insurance, that are a reflection of their high disposable income and are less directly pressured by inflation. Those in the lowest quintile spend 2 percent of their income on such products.

In the new Inflation Inequality Indices we built for the Foundation for Research on Equal Opportunity, we adjusted inflation rates for these differences in the baskets of goods consumed by the rich and the poor. From 1978 to 2021, we found that prices have cumulatively risen by 322 percent for the bottom decile, compared to approximately 279 percent for the top decile. The 43 percentage points is a significant divergence in cumulative inflation.

These differences are magnified by the fact that low earners tend to spend a much greater fraction of their incomes than do high earners.

When we adjust for this factor, from 2004 to 2021, Americans in the bottom decile experienced cumulative inflation of 81 percent, compared to only 10 percent for the top decile.

Looking at the cumulative effect of inflation across income groups is essential. If one looks only at the differences in inflation rates in a given year, the difference seems small. But compounded over time, they add up — even in a period of modest inflation.

The gap between the rich and poor is even wider when we account for the fact that income inequality has widened over the last several decades. High earners’ incomes have kept pace with — and often exceeded — growth in consumer prices, whereas low earners’ incomes have struggled to keep pace.

Furthermore, high earners have the ability to save what they don’t need to spend, unlike low earners. There is evidence that lower interest rates over the past decade have helped increase the value of assets of wealthier individuals. While both low-income and high-income borrowers benefit from lower interest rates, high earners have far more access to credit.

Our Inflation Inequality Indices help fill that gap, but what they reveal above all is that the Fed likely erred in moving from a fixed inflation target of 2 percent to a “flexible average” inflation target of 2 percent.

Most important, going forward, the Fed must incorporate into its thinking a rigorous, empirical understanding of how even modest inflation affects different income and wealth cohorts. Earlier this year, Federal Reserve chair Jerome Powell acknowledged that inflation is “particularly hard on people with fixed incomes and low incomes who spend most of their income on necessities.” 

It’s time for the Fed’s deeds to match Powell’s words.

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2 Responses

  1. As a young man in 1960 I mentioned to some friends that if I could make $10,000 a year; I could have all I needed to live well. In 1968 after college I started with Ford Motor Company at $8,400 a year and never stayed home broke till the next payday. Today with three times the income, I am continually on guard to not be broke. I have determined the cause of all this is the costs of government taxes, fees and uncontrolled government spending as well as regulations on business activity.
    The solution is replacement of our so-called representatives in Washington and elsewhere. Because it’s clear they are not really representing “We the People”.

  2. Mr. Steele, you wrote “I have determined the cause of all this is the costs of government taxes, fees and uncontrolled government spending as well as regulations on business activity.”, could you please tell us how you determined that? I have not heard even one professional economist blame the current inflation on those reasons. I am sure your insight will help them understand the situation better.

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