Inflation Used To Squeeze The Middle Class. Now It’s Hitting The Poor The Hardest

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The primary burden of inflation has shifted from middle class to low-income households thanks to a shift in the spending categories hardest hit by price hikes, according to a study published Wednesday by the Federal Reserve Bank of New York.

At the onset of rising inflation in the spring of 2021, middle-income households, defined as those earning between $50,000 and $150,000 per year, bore the brunt of inflation as they purchased more used cars and gasoline than other demographics, according to the New York Fed. However, as the cost of gas falls and the price of food and housing surges, lower-income households, defined as those earning less than $50,000, now face higher effective costs — roughly 0.3 percentage points higher than average — since they spend a larger portion of their income on food and housing than middle and high-income households. (RELATED: Retail Sales Ticked Down During The Holiday Season As Consumers Tightened Their Belts)

“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 reads. “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.”

Both food and the cost of shelter outpaced inflation in 2022, with food prices ending the year up 10.4% on an annual basis, while housing costs grew 7.5%, according to the Bureau of Labor Statistics. Consumer prices rose 6.5% overall, while energy costs were up 7.3%, despite declines towards the end of the year.

High prices contributed to a 1.1% decline in retail sales in December, as consumers focused on necessities like food and clothing and avoided high-cost items like furniture and cars.

The report also explores disparities amongst race and ethnicity, comparing the amount that white, Hispanic, black and Asian American/Pacific Islander (AAPI) households spend on food, housing and transportation.

As transportation inflation surged in 2021, Hispanic and black households saw their effective inflation shoot up to 1.5 percentage points and 1 percentage point higher than the national average, while white and AAPI households saw effective inflation roughly 0.3 and 1 percentage points lower than the national average.

Through the end of 2022, inflation disparities appear to have narrowed, with black, white, and AAPI households all facing roughly similar levels of inflation as transportation costs moderate, while Hispanic households saw an effective inflation rate roughly 0.27 percentage points higher than the national average, the New York Fed reported. The report notes that the increased cost of housing helped push AAPI inflation back in line with the national average.

The report notes that since it “does not distinguish different brands of the same good … our results are consistent with inflation inequality being even higher than our current measurements indicate.”

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