Friday, January 14, 2022

Inflation Inequality: Poorest Americans Are Hit Hardest By Soaring Prices On Necessities


By Jacob Orchard
THE CONVERSATION
01/14/22 

Inflation By The Numbers: U.S. Consumer Price Index Reaches Highest Level Since 1982

The fastest rate of inflation in 40 years is hurting families across the U.S. who are seeing ever-higher prices for everything from meat and potatoes to housing and gasoline.

But behind the headline number that’s been widely reported is something that often gets overlooked: Inflation affects different households in different ways – and sometimes hurts those with the least, the most.

Inflation, as calculated by the Bureau of Labor Statistics, is designed to track the price increases in a typical U.S. household’s basket of goods. The problem is spending bundles differ across households. For example, a family in the lowest 20% of income typically spends around 15% of their budget on groceries – this is nearly 60% more than households in the top 20% of the income distribution, according to my calculations.

The widening inflation gap


On Jan. 12, 2022, the BLS released figures showing that inflation jumped by 7% in December from a year earlier – the fastest pace since 1982. To see how this varied across households, I used the bureau’s own price data and factored in the typical spending habits of different income groups.

I calculate that inflation is running at 7.2% for the lowest income households – higher than for any other group. For the highest-income families, the rate of change was 6.6%.

The difference between the two income groups steadily increased throughout 2021, starting the year at just 0.16 percentage point but ending at 0.6 percentage point – near the highest it has been since 2010.

The reason for this widening rich-poor inflation gap, known by economists as inflation inequality, comes down to the typical spending habits of people in each income group.

In times of economic uncertainty and recession, most households tend to hold back on buying luxury goods. But by and large, people can’t cut down on necessities such as groceries and heating – although wealthier consumers are better placed to stock up on these necessities when prices are cheap.

This shift of spending away from luxury items like vacations and new cars, and toward necessities, pushes inflation up for poorer families more than richer ones. This is because lower-income households dedicate a higher percentage of their income on necessities.

My data shows that this inflation gap tends to be widest in times of recession or in the early stages of economic recovery. In the aftermath of the Great Recession of 2008-2009, the gap in inflation rates between the lowest and highest income groups was close to 1 percentage point – higher than it is now.

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By contrast, in times of economic growth – for example, from 2012 to 2018 – the gap narrows. It even inverted at one point in 2016; the inflation rate for poorer Americans was almost a half-percentage point lower than that of richer Americans.

The main driver of the growing gap in 2021 was the increases in groceries and gas prices. This has made inflation run hotter for all households. But given the greater proportion of household income that poorer families dedicate to food and energy costs, it has affected them more.

Take out gas and grocery prices, then the inflation gap is reduced significantly.

Going forward, I expect the inflation gap will follow a similar pattern as we saw after the Great Recession – as economic recovery turns into continued expansion, inflation will be lower for low-income households than high-income households.

More US consumers are shopping in stores this year compared with last year, according to the National Retail Federation Photo: GETTY IMAGES NORTH AMERICA via AFP / Brandon Bell

This article originally appeared in The Conversation.

Jacob Orchard is a Doctoral Candidate in Economics at the University of California San Diego.



Inflation at 40-year high pressures consumers, Fed and Biden


WASHINGTON (AP) — Inflation jumped at its fastest pace in nearly 40 years last month, a 7% spike from a year earlier that is increasing household expenses, eating into wage gains and heaping pressure on President Joe Biden and the Federal Reserve to address what has become the biggest threat to the U.S. economy.
© Provided by The Canadian Press

Prices rose sharply in 2021 for cars, gas, food and furniture as part of a rapid recovery from the pandemic recession. Vast infusions of government aid and ultra-low interest rates helped spur demand for goods, while vaccinations gave people confidence to dine out and travel.

As Americans ramped up spending, supply chains remained squeezed by shortages of workers and raw materials and this magnified price pressures.

The Labor Department reported Wednesday that a measure of inflation that excludes volatile food and gas prices jumped 5.5% in December, also the highest in decades. Overall inflation rose 0.5% from November, down from 0.8% the previous month.

Price gains could slow further as snags in supply chains ease, but most economists say inflation won’t fall back to pre-pandemic levels anytime soon.

“U.S. inflation pressures show no sign of easing,’’ said James Knightley, chief international economist at the financial services company ING. “It hasn’t been this high since the days of Thatcher and Reagan. We could be close to the peak, but the risk is that inflation stays higher for longer.’’

High inflation isn't only a problem for the U.S. In the 19 European countries that use the euro currency, inflation rose 5% in December compared with a year earlier, the biggest increase on record.

Companies large and small are adapting as best they can.

Nicole Pomije, a bakery owner in the Minneapolis area, said she plans to raise prices for cookies because of surging ingredient costs.

Her basic cookies were priced at 99 cents each, while premium versions were selling for $1.50 each. But Pomije said she will have to jack up the prices of her basic cookies to the premium price.

“We have to make money,” she said. “We don’t want to lose our customers. But I think we might.”

Businesses struggling to hire have hiked pay, but rising prices for goods and services have eroded those income gains for many Americans. Lower-income families have felt it the most, and polls show that inflation has started displacing even the coronavirus as a public concern.

High inflation has put President Biden on the defensive. His administration, echoing officials at the Fed, initially suggested that price increases would be temporary. Now that inflation has persisted, Biden and some congressional Democrats have begun to blame large corporations. They say meat producers and other industries are taking advantage of pandemic-induced shortages to drive up prices and profits. But even some left-of-center economists disagree with that diagnosis.

On Wednesday, the president issued a statement arguing that the drop in gas prices in December and a smaller increase in food costs showed progress.

One trend experts fear is a wage-price spiral. That happens when workers seek more pay to offset higher costs, and then companies raise costs further to cover that higher pay. On Tuesday, Federal Reserve Chair Jerome Powell told a Senate panel that he has yet to see evidence that wages are broadly driving up prices across the economy.

The biggest driver of inflation, according to economists, are mismatches between supply and demand. Used car prices have soared more than 37% over the past year because a shortage of semiconductors has prevented auto companies from making enough new cars. Supply-chain constraints have driven furniture prices nearly 14% higher over the past year.

Shoppers are feeling the pinch all around them, from the gas station to the grocery store.

Vicki Bernardo Hill, 65, an occupational therapist in Gaithersburg, Maryland, says she no longer throws extra canned food, boxes of cereal or bakery items into her shopping cart at the Giant Food store.

“I am trying to stick to my list and buying things that are on sale, ” said Hill.

Because she couldn't find a good deal on a used car, Hill recently bought a new Mazda, spending $5,000 more than she had planned.

Inflation could ease as the omicron wave fades and as Americans shift more of their spending to services such as travel, eating out and movie-going. That would reduce the demand for goods and help clear supply chains.

But some higher prices, such as rents, could prove to be stickier. Rental costs, which have accelerated since summer, rose 0.4% in December, the third consecutive monthly increase. That's significant because housing costs make up one-third of the government's consumer price index.

Powell told Congress that if it becomes necessary to fight high inflation more aggressively, the Federal Reserve is prepared to accelerate the interest rate hikes it plans to begin this year. The Fed's benchmark short-term rate, now pegged near zero, is expected to be bumped up at least three times this year.

Rate increases would make borrowing for a home or car more expensive, and therefore help to cool off the economy.

Some economists and members of Congress fear the Fed has acted too slowly to head off inflation and that this could eventually force even sharper rate increases that could damage the economy.

Republicans in Congress and even some liberal economists say Biden deserves at least some of the blame for high inflation, arguing that the financial rescue package he pushed through Congress last March added significant stimulus to an already strengthening economy.

______

AP Writers Paul Wiseman and Josh Boak in Washington, Dee-Ann Durbin in Detroit and Anne D'Innocenzio in New York contributed to this report.

Christopher Rugaber, The Associated Press

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