Low-income Americans suffered the brunt of the job losses when the pandemic hit. Now they are the hardest hit by price increases as the economy recovers.
The headline consumer inflation rate in the United States remains subdued at 1.7%, but it masks big differences in what people actually buy.
Some of the biggest price hikes in recent months, for example, have been in gasoline. A gallon of regular is up 75 cents from the end of last year – adding over $ 60 per month to the budget of someone filling up 20 gallons per week.
Food price inflation is more than double the headline rate, and basic items like household cleaning products have also climbed.
Price increases like these cause problems all over the world – and they tend to hurt low-income people the most. This is because groceries or gasoline take up a larger portion of their monthly shopping cart than does wealthier households, and these are items that cannot easily be deferred or replaced.
An analysis by Bloomberg Economics, which re-weighted consumer price baskets based on the spending habits of different income groups, found that the wealthiest Americans experience the lowest level of inflation.
Those same high incomes have already seen windfall gains during what has been called the K-shaped recovery of the pandemic. Their net worth surged, thanks to booming stock and real estate markets – and they mostly kept their jobs and were able to work from home.
What Bloomberg Economics says …
“On average, higher-income households spend a smaller portion of their budgets on food, medical care, and rent, all of which have experienced faster inflation than the stock in recent years, and 2020 in particular.”
– Andrew Husby, economist
The richest 10% of households captured 70% of the wealth created in 2020, according to the Federal Reserve, while the bottom half got just 4%. A January study by Opportunity Insights, a Harvard research project, found that the recession was essentially over for those earning at least $ 60,000 a year, while the lowest-paid jobs – who earn less than $ 60,000 a year. half of that amount – was still almost 30% lower. pre-pandemic levels.
The question of who exactly is affected by the price hike may become more urgent as inflation picks up. Most economists expect a recovery over the next 12 months.
The Fed, which is responsible for keeping inflation under control, says any increase will likely be temporary. The central bank has no plans to use its inflation-fighting tool of higher interest rates anytime soon.
The idea behind the Fed’s new thinking is that allowing the economy to run a little warmer – and inflation to rise a little more – will actually help reduce income inequality, because it will encourage a market. strong jobs that will benefit low-wage Americans the most. . There is evidence that this is already happening in the restaurant, hotel and other service industries.
Meanwhile, the Biden administration has said it will push U.S. statisticians to produce more detailed data that breaks down economic results for different racial or income groups.
This move could have consequences for people whose incomes are tied to measures of inflation – such as recipients of social security or food stamps. They can be squeezed when these gauges fail to accurately capture changes in the cost of living. There has been talk in the past, for example, of linking social security to an index that specifically measures the inflation experienced by the elderly.
The distribution issues raised by rising prices are not just an American phenomenon.
A United Nations gauge of global food costs rose for a tenth straight month in March, the longest string of increases since 2008, when the world faced the first of two food crises in just a few years.
“The history of food prices and inflation is important to the issue of equality,” says Carmen Reinhart, chief economist of the World Bank. “It’s a shock that has very uneven effects.”
The K-shaped inflation problem predates the pandemic and could have root causes, according to Xavier Jaravel, assistant professor at the London School of Economics.
His research has shown that one of the main reasons richer people experience lower inflation rates is that there is more competition among producers for their dollars – which leads to higher levels of income. innovation in the type of goods and services purchased by the rich, which helps to maintain prices. down.
“It is hoped that statistical agencies around the world will soon adopt new data sources and price indexes to better measure inflation inequalities,” Jaravel wrote in a recent article, “and that economists will give more pay attention to the distributive effects of prices. “
(Updates with new United Nations data on world food prices in 15th paragraph.)