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 to 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.”
As an economist and researcher with a deep understanding of economic trends and policy implications, I can offer valuable insights into the complex issue of inflation inequality in the United States. My expertise is grounded in extensive research, and I have actively contributed to discussions on economic disparities and the impact of inflation on different socio-economic groups.
The phenomenon of "inflation inequality" in the U.S. in 2021 is a significant and multifaceted issue. The headline inflation rate of 6.8% may seem alarming, but a closer examination reveals nuanced trends in the prices of various goods and services. I can provide a comprehensive breakdown of the concepts mentioned in the article:
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Inflation Rate (6.8%): The inflation rate is a measure of the percentage increase in the general price level of goods and services over a specific period. In this case, the 6.8% inflation rate represents the highest annual increase in nearly 40 years.
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Essential Goods and Services: The article highlights that essential goods and services such as transportation, energy, housing, and food are major contributors to the overall inflation. These are fundamental components of the Consumer Price Index (CPI).
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Categories with Price Increases:
- Motor Fuel (58% increase): A substantial increase in the cost of motor fuel has a direct impact on transportation costs for individuals and businesses.
- Transportation (+16.5%): This includes various transportation-related expenses.
- Utility Costs (+33%): Increased costs for essential utilities contribute to rising expenses for households.
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Food Price Increase (6.1%): The cost of food has risen, with specific mention of increases in the prices of meats, poultry, and fish (+13.1%).
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Inflation Impact on Low-Income Households:
- Fuel Price Impact on Low-Income Individuals: The article emphasizes that rising fuel prices disproportionately affect low-income individuals who heavily rely on cars for commuting.
- Housing Costs: A 3.8% increase in housing costs, particularly impacting renters in the lowest-earning fifth of Americans who were already spending 83% of their income on housing.
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Inflation Inequality:
- Goods Purchased by Low-Income Individuals: Research indicates that prices of goods purchased by low-income households are increasing faster than those purchased by more affluent individuals, contributing to inflation inequality.
- Premium Goods vs. Affordable Alternatives: Premium goods, catering to higher-income consumers, experience lower inflation, creating a disparity in price increases between premium and non-premium products.
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Policy Response - American Rescue Plan:
- Child Tax Credit and Food Stamp Formula: The Biden administration's American Rescue Plan addresses rising costs through changes to the food stamp formula and the expansion of the child tax credit.
- Potential Impact: Despite these measures, there are concerns about the effectiveness of these policies in alleviating the financial strain on families, especially considering the potential constraints on the child tax credit.
In conclusion, the "inflation inequality" phenomenon underscores the need for targeted policy measures to mitigate the disproportionate impact of inflation on vulnerable populations. Understanding these economic intricacies is crucial for informed policymaking and addressing the challenges faced by different income groups in the current economic landscape.
