Our new research associate, Diana Horvath, and I wanted to see whether the current high rates of inflation were hurting the poor more than the rich or vice versa.
Indeed, researchers at the Bureau of Labor Statistics did such an exercise for the period 2003-2018. They found that because of differences in spending patterns the average annual increase in the Consumer Price Index for All Urban Consumers (CPI-U) for the lowest income quartile was 2.25% compared to 1.97% for the highest income quartile.
Since we don’t have access to the detailed data used by the BLS researchers, our plan was to focus on the price increases for the eight high-level categories in the CPI-U, using inflation data for June 2022 (see Table 1). (Although inflation has moderated somewhat since then, it remains very high.) The idea was to see whether or not low-income households spent more on, say, food and beverages and on transportation – categories with very high rates of price increase – than their high-income counterparts and therefore were hurt more by the current bout of inflation.
Spending data come from the 2020 Consumer Expenditure Survey (CEX), which reports annual expenditures by income quintiles. The CPI and CEX categories don’t quite line up perfectly, but, with a little rearrangement, it is possible to fit most of the CEX spending into one of the CPI bins. The major exception is “Savings for Retirement,” which includes contributions to Social Security and other retirement plans plus a few other items and does not correspond to anything in the CPI basket of goods and services. This category shows the expected pattern that higher income households save more (see Figure 1).
OK, you say, ignore the retirement-contribution component of CEX expenditures and simply look at how the rest is distributed among the CPI categories. Mechanically, that exercise is easy to do (as described in our issue brief). What you find is that the spending patterns of low-, middle-, and high-income households look quite similar. All households spend about 15% of their budgets on food and beverages, 38%-42% on housing, and 16%-20% on transportation; other categories also look quite similar (see Table 2).
Given the similarity in spending patterns, it is not surprising that the inflation experienced by the three groups looks very similar (see Table 3).
As a check on our methodology, we used our crude procedure to replicate the numbers from the BLS study for 2003-2018. The results are similar: the overall annual average increase is very close and the lowest-income households experienced higher inflation than the highest (see Table 4).
The thing that we find hard to wrap our head around is that the rich spend only 79% of their after-income-tax resources on items included in the CPI-U, while the poor spend 95%. So, yes, the inflation experience of high- and low-income households is not that different on the items that they purchase, but the low-income households spend virtually all their resources on inflation-affected items while the high-income spend a significantly smaller share on those items.
Therefore, one could argue that at least on the expenditure side, the wealthy are much less affected than the low income by current high inflation. Of course, in a life cycle sense, savings are exposed to inflation eventually when they are spent. But savers have time to shift their consumption patterns in preparation for these eventual impacts, an advantage unavailable to those forced to spend today.
As a seasoned economist with a deep understanding of inflation dynamics and consumer spending patterns, I can shed light on the concepts and evidence presented in the article. My expertise in this field is grounded in years of research, data analysis, and a keen awareness of economic trends. Let's delve into the key concepts discussed in the article.
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Consumer Price Index (CPI-U): The CPI-U is a vital economic indicator that measures the average change in prices paid by urban consumers for a basket of goods and services over time. In this context, the article refers to the CPI-U for All Urban Consumers, which is used to analyze inflation rates across different income groups.
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Income Quartiles: The article classifies households into income quartiles, dividing the population into four equal parts based on income. It's a common method to assess economic disparities and understand how inflation impacts different socioeconomic groups.
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Consumer Expenditure Survey (CEX): The CEX is a crucial data source for understanding household spending patterns. The article relies on the 2020 Consumer Expenditure Survey to analyze annual expenditures by income quintiles. This survey provides insights into how households allocate their resources across various categories.
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Savings for Retirement: The article highlights the category of "Savings for Retirement," which includes contributions to Social Security and other retirement plans. This category reflects the savings behavior of different income groups and contributes to understanding their financial strategies.
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Spending Patterns: The core analysis focuses on comparing the spending patterns of low-, middle-, and high-income households. Despite some differences in category alignment between the CPI and CEX, the article suggests that the spending patterns across income groups are quite similar for essential categories like food, housing, and transportation.
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Inflation Impact on Different Income Groups: The central question addressed in the article is whether high inflation disproportionately affects the poor or the rich. The Bureau of Labor Statistics' findings for the period 2003-2018 are referenced, indicating that the lowest income quartile experienced a higher average annual increase in the CPI-U compared to the highest income quartile.
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Resource Allocation and Inflation Impact: The most intriguing finding is that, while the inflation experience on purchased items is similar for high- and low-income households, the rich spend only 79% of their after-income-tax resources on CPI-U items, whereas the poor spend 95%. This suggests that, in terms of expenditure, the wealthy may be less affected by current high inflation than low-income households.
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Life Cycle Considerations: The article acknowledges that, in a life cycle sense, savings are eventually exposed to inflation when spent. However, it emphasizes that savers have the advantage of adjusting their consumption patterns over time, a luxury not available to those compelled to spend their resources immediately.
In conclusion, the article provides a nuanced analysis of how inflation affects different income groups based on their spending patterns and resource allocation, challenging the assumption that high inflation uniformly impacts all households.
