How inflation is disproportionally affecting the poor
This is an excerpt from an article by FREOPP on the effects of inflation on American citizens.
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FREOPP | 1min |
This is an excerpt from a large essay named Inflations Compounding Impact on the Poor by Jackson Mejia from FREOPP.
Executive Summary
Inflation is one of the most widely discussed subjects in economic policy, especially at a time when common measures of inflation, like the Consumer Price Index for All Urban Consumers (CPI-U), are at 40-year highs.
Despite these facts, however, there are many important aspects of inflation that are either misunderstood or ignored, especially when it comes to how inflation affects lower-income Americans:
Low-income Americans generally experience higher inflation rates than high-income Americans. Inflation indices like CPI-U attempt to measure price inflation for the average consumer. But most people are not average, and therefore, a single consumption “basket” does not reflect the way most Americans experience inflation. In particular, lower-income Americans have generally experienced higher inflation rates because housing represents a higher proportion of their spending, on average.
Even modest inflation, compounded over time, disproportionately harms low earners. Most economists regard the period from 1982 to 2020 as a period in which the Federal Reserve managed inflation well, by keeping it stable and low. But because lower earners’ consumption baskets lead to slightly higher inflation rates, over time, the compounded effect of these higher rates is significant. From 1978 to 2021, the compounded effect of inflation was 43 percentage points higher for the lowest income decile vs. the highest.
When adjusted for purchasing power, the impact of inflation on low earners is even worse. If the annual price of groceries for a family of four rises from $3,000 to $4,000, a wealthy family is far more able to absorb the extra $1,000 in costs than the working poor. If we examine the absolute impact of inflation, we find that from 2004 to 2020, earners in the bottom decile experienced inflation that was 71 percentage points higher than for the top decile, on a compounded basis.
These results mean that, even in an era of “modest” inflation, low earners need to experience faster wage growth than high earners do in order to keep pace. In general, the reverse has happened: high earners’ incomes have grown much faster than those of low earners.
Takeaway Inflation affects the poorest of society harder. Those closest to the money "printer" tend to become more wealthy at the cost of the others, which is called the Cantillon Effect.
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