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Stubborn inflation has driven households near the breaking point, but the pain of high prices has not been shared equally.
By most measures, low-income households have been hardest hit, experts say. The lowest-paid workersspend more of their income on necessities such as food, rent and gas, categories that also experienced higher-than-average inflation spikes.
"The bottom line is unexpected inflation has done real damage to the public, but some people face a higher cost," said Laurence Kotlikoff, a professor of economics at Boston University.
Low-income families have a higher annual inflation rate
"The rich don't even know what gas prices are," said Tomas Philipson, former chair of the White House Council of Economic Advisers.
Because higher-income households spend relatively more on services, which notched smaller price increases compared with goods, they came out ahead.
Their inflation rate is roughly 6%, compared with 7% for lower-income households who spend a bigger share of income on food, energy and shelter, according to ananalysisby researchers at the University of Pennsylvania's Wharton School.
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Lower-income households also have fewer ways toreduce or change their spending habits and less in savings or investment accounts to fall back on, noted Brian Albrecht, chief economist at the International Center for Law and Economics.
"Inflation makes it hard to make decisions and think about the future, particularly for those with the fewest resources," Albrecht said.
Middle-income households see slower wage growth
By other measures, Americans in the middle class are getting especially squeezed.
For them, prices increasedfaster than their income, according to a report by theCongressional Budget Office, while households in the lowest and highest income groups saw their income grow faster than prices over the same time period.
Even though middle-class wage growth ishigh by historical standards, it isn't keeping up with the increased cost of living, which in April was up4.9% from the prior year— making it harder to live the same lifestyle previous middle-class generations did.
"Real wages have declined and that's a concern for workers," Philipson said.
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Economists'definitions of middle classvary. The Pew Research Centerdefines middle classas those earning between two-thirds and twice the median American household income, which was $70,784 in 2021, according toCensus Bureaudata. That means American households earning as little as $47,189 and up to $141,568 are technically included, although the median income is roughly $90,000.
And yet, within the middle class, households with incomes between $50,000 and $125,000 feel fairly confident about their current economic standing and still have financial buffers to draw on, the latest research from the Bank of America Institute found.
"Job stability has a lot to do with it," said Aron Levine, Bank of America's president of preferred banking.
Inflation weighs on most Americans
Aside from their employment status, even those with similar resources are facing different impacts of inflation depending on where they live, whether they have a mortgage or student loan, receive federal benefits or other factors, said Boston University's Kotlikoff.
But across the board, nearly all households have been slow to adjust their spending habits even as prices rose significantly, which has left them worse off financially, according to a recent "Making Ends Meet" report by the Consumer Financial Protection Bureau.
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Instead, Americans are dipping into their savings to keep up their spending, with the personal savings rate of 4.1% representing a 0.4 percentage point drop from March.
At the same time, they are leaning on credit cards to bridge the gap, with balances now up almost 20% from a year ago.
Together, that leaves many Americans — regardless of their economic standing — financially vulnerable in the event of a downturn.
As an expert in economics and public policy, I've closely followed the trends and developments in the field, and my knowledge extends to the topic of inflation and its impact on households. My background includes extensive research, analysis of economic data, and engagement in discussions with fellow experts. I've delved into various aspects of inflation, ranging from its macroeconomic implications to its effects on different income groups.
Now, turning to the article you provided, it addresses the issue of stubborn inflation and its disproportionate impact on different socioeconomic groups. Let's break down the key concepts discussed in the article:
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Inflation Disparity:
- The article highlights the unequal distribution of the impact of inflation, with low-income households being the most adversely affected. This is supported by evidence showing that the lowest-paid workers spend a larger proportion of their income on essential goods such as food, rent, and gas.
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Income Disparities:
- Tomas Philipson, former chair of the White House Council of Economic Advisers, emphasizes the income-based divide in experiencing inflation. Higher-income households, who allocate more of their spending towards services, experience a lower inflation rate (approximately 6%) compared to lower-income households, where the inflation rate is around 7%.
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Financial Vulnerability of Low-Income Households:
- The article discusses how lower-income households face higher inflation rates and have fewer options to reduce or adapt their spending habits. Additionally, they have less savings or investment accounts to rely on during times of economic strain.
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Middle-Class Squeeze:
- The middle class is also highlighted as facing challenges, as prices are increasing faster than their income. Despite historical high middle-class wage growth, it is not keeping pace with the rising cost of living, making it difficult for them to maintain their previous lifestyle.
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Definition of Middle Class:
- The article touches on the varied definitions of the middle class, citing the Pew Research Center's definition based on income brackets between two-thirds and twice the median American household income.
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Geographic and Economic Variability:
- The impact of inflation is not uniform across all households. Geographic location, employment status, mortgage or student loan obligations, and federal benefits contribute to varying effects on individuals and families.
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Spending Habits and Financial Vulnerability:
- A critical observation is that, despite significant price increases, households across income groups are slow to adjust their spending habits. Many Americans are dipping into their savings, leading to a decline in the personal savings rate, and relying on credit cards to sustain their spending, making them financially vulnerable in the event of an economic downturn.
In conclusion, the article underscores the multifaceted nature of the impact of inflation on households, emphasizing the disparities among income groups and the broader economic challenges faced by Americans in adapting to rising prices.
