The poorest Americans are hit hardest by soaring prices for basic necessities

Graphic: The Conversation, CC-BY-ND Source: Jacob Orchard

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

But behind the figure that has been widely reported, there is something that is often overlooked: inflation affects different households in different ways and sometimes hurts those who have the least, the most.

Inflation, as calculated by the Bureau of Labor Statistics, is designed to track price increases in a typical American household’s basket of goods. The problem is that the expense groups differ from household to household. For example, a family in the bottom 20% of income typically spends about 15% of their budget on groceries, almost 60% more than households in the top 20% of the income distribution, according to my calculations.

The widening of the inflation gap

On January 12, 2022, the BLS released figures showing inflation jumped 7% in December from a year earlier, the fastest pace since 1982. To see how this varied from household to household Else, I used the office’s own pricing data and factored in the typical spending habits of different income groups.

I calculate that inflation is 7.2% for the lowest income households, which is higher than for any other group. For families with the highest incomes, the rate of change was 6.6%.

The difference between the two income groups increased steadily throughout 2021, starting the year at just 0.16 percentage points but ending at 0.6 percentage points, near the highest level since 2010.

The reason for this widening rich-poor inflation gap, known to 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 from purchasing luxury goods. But on the whole, people cannot cut back on spending on basic necessities such as groceries and heating, although wealthier consumers are in a better position to stock up on these necessities when prices are cheap.

This shift in spending from luxuries like vacations and new cars, to basic necessities, drives up inflation for poorer families more than for wealthier families. Indeed, low-income households spend a higher percentage of their income on necessities.

My data shows that this inflation gap tends to be wider during recessions 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 almost 1 percentage point, more than it is now .

On the other hand, in periods of economic growth, for example from 2012 to 2018, the gap narrows. It even reversed at some point in 2016; the inflation rate of the poorest Americans was nearly half a percentage point lower than that of the wealthiest Americans.

The main driver of the growing gap in 2021 has been rising grocery and gasoline prices. This made inflation higher for all households. But given the greater proportion of household income that poorer families spend on food and energy expenditure, this has affected them more.

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

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

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Inflation inequality: Poorest Americans hit hardest by soaring prices for basic necessities (2022, January 13)
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