Low-income households, young Americans, and less educated individuals were more affected by inflation than other categories, according to new reports by the Federal Reserve Bank of New York.
Economists at the regional central bank published two studies this month that assessed inflation disparities by income, age, race, and education. They found that those who spent more of their earnings on food, transportation, and housing felt the most amount of inflationary pain from early 2021 to June 2022.
The first report discovered that blacks, Hispanics, and middle-income households faced financial pressure as they dedicated more of their spending to transportation costs.
“This pattern is largely because a greater share of these groups’ expenditures is devoted to transportation, particularly used cars and motor fuel, categories that led the 2021 inflationary episode. However, over the last five months, as transportation inflation has declined, these gaps have declined as well,” the report authors said.
In June, gasoline prices peaked at $5.01 per gallon, and since have tumbled 32 percent.
The used cars and trucks index surged at a peak of 27 percent last year. But recent Bureau of Labor Statistics (BLS) data show that the index plunged 8.8 percent year over year in December 2022.
In a separate New York Fed report published on its Liberty Street Economics blog, inflation disparities were situated among young and less-educated Americans because they spent a considerable portion of their income on used cars and motor fuel.
Gasoline prices at an Exxon gas station behind an American flag in Edgewater, New Jersey, on June 14, 2022. Mike Segar/Reuters
This was exacerbated for households in rural areas where prices were generally higher than in urban communities, particularly for transportation needs.
But researchers concluded that many of these inflation gaps are narrowing as “transportation inflation converges toward average inflation.”
The latest Consumer Price Index (CPI) report found that new vehicles tumbled 0.1 percent month over month, used cars and trucks slipped 2.5 percent, gasoline declined 9.4 percent, and transportation services edged up 0.2 percent.
Still, low-income U.S. households endured “above-average inflation because of their higher proportional spending on food and housing, categories for which prices were rising more rapidly at the time.”
The bottom 40 percent of households by income were hardest ht as inflation became embedded throughout the national economy. New York Fed economists noted that low-income groups were affected because they could not substitute cheaper goods and services, and maintained smaller cash reserves.
“As of December 2022, the bottom 40 percent have the highest year-on-year inflation rate of the three groups, and the inflation rate of the middle-income group is below the national average,” the report stated. “It is likely the case that the same rate of inflation represents a greater welfare loss for lower-income than higher-income households because of the former’s lower capacity for substituting to less-expensive goods, greater liquidity constraints, and larger marginal utility of real income.”
Does Inflation Hurt the Rich or Poor?
When it appeared that rampant price inflation became more than “transitory,” White House officials and left-leaning economists suggested that inflation was only a problem for wealthy Americans.
Jason Furman, a Harvard professor and chair of the Council of Economic Advisers in the Obama administration, noted in a tweet that most of the economic issues plaguing the United States, including inflation and supply chain challenges, were “high-class problems.”
This tweet was endorsed by Ron Klain, White House chief of staff.
Former White House press secretary Jen Psaki dismissed the supply-chain crisis as “the tragedy of the treadmill that’s delayed.”
Economist Paul Krugman, who writes a column for The New York Times, disputed the idea that inflation affects lower-income Americans.
“‘Inflation especially hurts the poor’ has truthiness—it sounds like it should be true. But I don’t see either evidence or a mechanism,” he wrote in a tweet in December 2021.
These ideas also graced headlines of mainstream media outlets and left-wing blogs.
CNN told its readers in December 2021 that “inflation can actually be good for everyday Americans.” Likewise, the Intercept noted that “inflation is good for you.”
Economist and Nobel Prize winner Paul Krugman speaks with journalists after meeting Japanese Prime Minister Shinzo Abe in Tokyo, Japan, on March 22, 2016. Franck Robichon/AFP/Getty Images
Others contend that inflation wreaks havoc mainly on the poor.
“High inflation, in short, tends to worsen inequality or poverty because it hits income and savings harder for poorer or middle-income households than for wealthy households. Households that have recently escaped poverty could be pushed back into it by rising inflation,” wrote economists Indermit Gill and Peter Nagle at the Brookings Institution.
William Anderson, a professor emeritus of economics at Frostburg State University and editor at the Mises Institute, stated that inflation had benefited billionaires because the Federal Reserve’s monetary expansion resulted in dramatic gains in the stock market in 2020 and 2021.
Ultimately, critics of the assertion that inflation only hurts the affluent purport that higher prices mean less spending, saving, and investing.
In addition, consumer surveys have revealed that typical households have been going to great lengths to survive the inflationary environment of the last couple of years.
A September NPR/PBS Newshour/Marist poll revealed that 40 percent of respondents were driving less to save on gas, 39 percent cut back on food or groceries, and 20 percent skipped a doctor’s visit or buying prescription drugs.
At the same time, a LendingTree survey found that two-thirds of consumers worried about affording groceries due to inflation. According to The New York Times, more consumers have been using “buy now pay later” services to purchase groceries.
“The fact that there’s a large number of Americans that simply can’t afford to buy food highlights the desperation that this economic climate creates,” Marshall Lux, a fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School, told CNBC. “Once people start stretching out grocery payments it shows the height of personal desperation.”
Nearly one-third of U.S. households believe their financial situation will worsen over the next year, according to the New York Fed’s Survey of Consumer Expectations. With underlying inflation pressures still scattered throughout the economy, especially for essential items, 2023 could still be a challenging time for low- and middle-income Americans.
A recent study by The Heritage Foundation reported that the typical American family had lost $7,400 since January 2021 as many consumer staples have surged since then.
Andrew Moran
Author
Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."
