The Tragedy Of Inflation Inequality (By The Numbers)

Whenever I get the feeling I’ve talked too much about so-called “K-shaped” inflation (the phenomenon in which rising prices affect households differently based on demographics), I remind myself that it’s arguably the most important economic issue of the pandemic era.

The last time I broached the subject was — checks watch — seven days ago. In “The Politics Of Inflation,” I noted that although the broadening out of price pressures has led to a more uniform increase in expectations across demographic cohorts, the K-shaped phenomenon was still evident in the latest installment of the NY Fed’s consumer survey.

Specifically, near-term expectations are still very elevated for the least educated and least well-off households, while longer-term expectations for those making $100,000 or more and for those with at least a bachelor’s degree remain generally well anchored (below 4%).

I (strongly) encourage readers to peruse the linked article (above) at their leisure, as it makes a number of important points about how partisanship “has overwhelmed other economic correlates” (to quote the University of Michigan’s Richard Curtin) when it comes to consumer inflation expectations.

But for our purposes here, politics is tangential. Rather than bury the lede or otherwise indulge my penchant for verbosity, I’ll get straight to the point. The figure (below) shows K-shaped inflation by the numbers.

The chart is derived from data gathered by Penn Wharton, which utilized the BLS’s Consumer Expenditure Survey to “find out how US households spend their money and how that varies across income groups.”

The study, detailed in a blog post published earlier this month, broke down household expenditures for major categories using “bundles” for 2019 and 2020. The figure (above) shows the 2019 bundle to capture how households spent their money prior to the pandemic.

The picture is similar for 2020 (figure below) to the extent the highest income group spent a much smaller percentage on food, energy and shelter than lower income cohorts.

Why does this matter? Well, I hope that’s obvious. The cost of food and energy have risen sharply, and shelter costs are rising on a lag as the impact of what many describe as a new American housing bubble starts to manifest in the official inflation data.

“Lower-income groups spent relatively more on food, energy and shelter,” Penn remarked, after noting that November’s CPI report showed the price of food jumped 6.1% YoY, while average energy prices climbed more than 33% (figures below).

“These price increases do not affect all households in the same way because the consumption baskets of high-income and low-income households differ,” Penn went on to say.

Obviously, richer households spent more money in aggregate than lower-income families. But it’s the percentage increase in total expenditures as a result of the difference in the consumption baskets that matters.

The figure (above) tells the story. The richest households spent 6.1% more this year versus 2020 and 6% more than the 2019 baseline. The least well-off households, by contrast, spent almost 7% more compared to previous years.

“Because of variation in the composition of consumption bundles… higher-income households had smaller percentage increases in their total expenditure[s],” Penn said, concluding.

Of course, that feeds into the disparity between excess savings detailed here on Tuesday. The less burdensome inflation is, the more you have left over to save and invest. If the return on invested capital exceeds the prevailing rate of growth, you’re on the “right” side of spiraling inequality.

As one researcher on poverty and social policy told CNBC, the dynamics outlined above are “going to lead to difficult choices between putting gas in the car or paying for your kids’ child care or putting food on the table.”

I’d be remiss not to note that an extension of the expanded child tax credit would help. But Joe Manchin is (ostensibly) concerned about making inflation worse — he’s worried that policies aimed at improving the economic prospects of the poor will backfire by exacerbating price pressures.

There’s a Maserati Levante joke. But I’ll refrain.