Uneven inflation has hurt poor households and redistributed wealth to the rich
Americans have paid higher prices for everything from utilities to groceries in 2021. But as the specter of inflation haunts the US economy for the first time in decades, it has been the poorer members of society who have suffered the most, a phenomenon economists are calling “inflation inequality”.
The US inflation rate rose 6.8% since last November, according to labor department data, the highest annual increase in nearly 40 years. Those price increases have been largely driven by essential goods and services: transportation, energy, housing and food.
The headline figure of 6.8% doesn’t tell the full story. Not everything got more expensive. Airline fares, eyeglasses and medicinal drugs stayed relatively stable or even got more affordable. But several essential goods and services skyrocketed in price.
Motor fuel cost went up by an astounding 58% from a year ago.
Transportation (+16.5%) and utility costs (+33%) increased dramatically in the past year.
The cost of food overall went up by 6.1%, driven by the rising price of meats, poultry and fish (+13.1%).
“It’s becoming harder to stretch that dollar to get what people need,” said Christopher Wimer, co-director of the Center on Poverty and Social Policy at Columbia University.
Price inflation hurts poor Americans more
While all Americans have noticed an increase in prices, the tangible effects of inflation are felt more heavily by poor households.
“There’s this view that inflation is the same for everyone when, in fact, it’s not,” said Xavier Jaravel of the London School of Economics.
On a basic level, lower-income households don’t earn enough money to even pay for the essentials: housing, transportation, food and healthcare. So when the price of something like gasoline increases by 58%, households have to make difficult choices about what to cut out.
Skyrocketing fuel prices have had an outsized impact on low-income people who use cars to get to work. Meanwhile, housing costs increased by 3.8% – the largest 12-month increase since 2007.
The lowest-earning fifth of Americans were already spending 83% of their income on housing, according to the labor department’s Consumer Expenditure Survey and the large majority of them are renters who bear the brunt of this cost increase.
“Low-income groups are more exposed to housing inflation because they tend to be renters,” Jaravel said. “If you’re a homeowner, you gain from the housing value going up.”
But another reason price inflation hurts low-income households is that the prices of goods they purchase are increasing faster than prices of goods purchased by more affluent people, according to Jaravel’s research.
“In the organic food market, which caters primarily to the rich, there’s been much lower inflation,” Jaravel said.
Jaravel’s research finds that the price of premium goods are actually decreasing compared to the goods in the same category that lower-income people buy. The increase in popularity of those items and in turn, the competition for higher-income consumers means premium products become more affordable over time – at least for those who can afford it.
Research by Jaravel, Wimer and Sophie Collyer found that accounting for this “inflation inequality” would have increased the number of Americans who were in poverty by 3.8m in 2018.
The Biden administration’s American Rescue Plan included anti-poverty measures that could help households with rising costs. That includes changes to the food stamp formula to keep up with the rising price of food and the expansion of the child tax credit – a policy that now gives families $3,600 a year for each child under age six and $3,000 for older children, up from $2,000 last year. Census Bureau data reveals that recipients of this money have put it toward necessities like food, utilities, rent and repaying debt. But those tax credits are now under threat as the Biden administration struggles to save the president’s Build Back Better bill.
Even if the child tax credit can be saved, Wimer said it may not be enough: “The ability of those policies to really help families make ends meet is going to be constrained.”
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