Inflation’s Pain Disproportionately Borne by Low-Income Consumers

American Consumer Institute Finds Rising Prices for Energy, Transportation, Housing, Medical Care and Cable TV

Summary

With Labor Day fast approaching, we analyze the effects of inflation on consumers and find that, since the time when the economic recovery began in November 2001, the average household has lost (cumulatively) $10,500 of their hard-earned money due to rising prices.  High energy and fuel prices have pushed up transportation and housing expenses, and other services like medical care and cable TV prices have also grown briskly.  As this ConsumerGram will show, low-income households face higher rates of inflation compared to more affluent households. 

Inflation Weakens Consumer Spending Power

Since the economic recession ended in November 2001, U.S. consumer prices have increased over 14%, requiring consumers to spend (over the years) $10,500 more as a result of inflation.[1]  In this year alone, consumers will need to spend $5,400 more than they did when the recovery started.  Figure 1 shows how much more consumers must spend annually in order to keep up with higher post-recession retail prices.  On a per household basis, the biggest increase in cost has been in energy prices (primarily gasoline and heating fuels).  Compared to when the economic recovery began, households pay $1,989 (annually) more for transportation and $1,599 more (annually) for housing due to inflation.  Healthcare and education prices have also increased faster than other consumer prices, and as shown in Figure 1 are having a sizable annual impact ($859) on consumer budgets.  Similarly, consumers will need $687 more for food to keep up with the erosion of purchasing power.  The increased annual spending needed to cover higher cable TV prices accounts for nearly all of the increase within the broader recreational and entertainment category.  The sharp increase in cable TV prices reflects the lack of competition in most U.S. markets.  On the positive side, however, prices for apparel and telecommunications (which includes information services) have actually declined over the period, saving consumers (annually) $98 and $96, respectively. 

Figure 1:  Annual Household Spending Required to Keep Up With Inflation

Since the Economic Recovery

                           Consumer Expense                                         Lost to Inflation

Inflation Disproportionately Harms the Poor

These inflationary impacts are averages.  The effects of inflation on individual households depend on what consumers actually buy.  The data show that low-income consumers, those consumers who may spend a large proportion of their income on necessities (such as transportation and heating oil), are most vulnerable to recent inflationary forces.  Figure 2, on the next page, provides evidence that inflation affects low-income consumers relatively more than high-income consumers, and may help explain the weaker and growing gap in consumer confidence between low-income and high-income households.[2]  For instance, since the economic recovery began, households with incomes exceeding $70,000 per year saw prices increase 13.5% for the market basket of items they purchased.  Meanwhile, households with less than $20,000 saw prices increase 16% (on average) for the items they purchased.  Figure 2 shows the correlation between income and inflation – namely, the rate of inflation decreases as household income increases.  Compared with more affluent households, the evidence demonstrates that low-income households are relatively more harmed by inflation.   

Higher energy prices have led to a surge in utility and transportation expenditures.  These higher costs explain much of the divergence of inflation between low- and high-income groups.  The differences in inflation are most evident in transportation, as shown in Figure 3, and housing, as shown in Figure 4.   

What Can Consumers Do?

Consumers need to budget, prioritize, comparison shop, and look for ways to save.  Unfortunately, consumers are largely powerless over energy costs, which are a major source of recent inflationary pressures.  For some, using public transportation can save money.  While gasoline prices have increased 140% since the economic recovery, public transportation has increased only 10%.  In terms rising cable TV bills, the U.S. Congress is considering legislation to encourage competition, which may lower cable TV bills by 30%.  Consumers should contact their U.S. Senators and urge them to support legislation that will encourage cable TV encourage competition.      

Conclusion

When retirees, workers and welfare recipients receive cost-of-living increases, they are usually given a set percent to cover the average loss of purchasing power caused by inflation.  However, as this ConsumerGram demonstrates, the actual inflation of consumers can vary by group.  Specifically, the American Consumer Institute finds that energy prices are eating away at consumer budgets and, during this economic upturn, low-income households have been disproportionately affected by higher inflation.

Methodology

This analysis uses the U.S. Census Consumer Expenditure Survey to determine a market basket of goods and services purchased by households of different income size.  Using publicly available consumer price indexes from the Bureau of Labor Statistics (BLS), and the market basket purchased by households of different income groups, consumer inflation was estimated for each income group.[3]  A similar approach was used by the Bureau of Labor Statistics in its analysis of inflation on the elderly.[4]