Does higher inflation disproportionately affect low-income households? A surprising answer

It is only through labor and painful effort, by grim energy and resolute courage, that we move on to better things

- Theodore Roosevelt

June saw the largest 12-month increase in the Consumer Price Index for All Urban Consumers since 1981, a whopping 9.1%. Most of this rise is a result of gasoline, housing, and food, but the question is does the increase in prices for these goods disproportionately affect lower income households?

Most recently, inflation has beaten expectations, leading to some well-welcome green days in the market. We are still, however, seeing higher inflation than we have been accustomed to over the last ten years or so. Election results from the midterms also seem to indicate that inflation is the highest concern on voters’ mind.

Now while it may seem that inflation is something that would disproportionately affect low-income households, this is actually not the case, as surprising as that may be for our readers.  

Analysis from the BLS and Boston College Center for Retirement Research indicates that inflation that is experienced from low-income groups is 6.8 percent versus 6.3 percent for the highest quintile, not nearly as drastic as we would imagine. How can this be when people in high-income groups can spend so much?

In June, the indices with the largest 12-month increases were transportation, food and beverages, and housing, with rates of 20%, 10%, and 7% respectively. It turns out, however, that for all income groups, the share of expenditure that these categories occupy is roughly the same across all the income groups. The only exception is “savings for retirement.”

One of the conclusions we can draw from this is, fascinatingly, that all income groups are exposed to this inflation spike since we all need to drive, eat, purchase homes etc. The highest income groups aren’t special and still need to eat. The place where they see the most benefit, however, is in their retirement savings.

While they still are spending more than they have in the past, these high-income households, they are the group that is able to find those dollars that they need to put aside for retirement, and that may be the saddest effect of this inflation spike.

The damage that it is causing will only materialize in the future, not today, but when families and individuals will not be able to retire because they haven’t been able to put aside the dollars today that they need to because those extra dollars needed to pay for their lives today.

And as we see the market recover over time, those returns will not be experienced by the low-income households. They will have to work longer and harder just to survive. This is the tragedy of inflation.

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.

- Ernest Hemingway