Low, middle and high-income households share more in inflation

Our research associate, Diana Horvath, wanted to see if the current high rates of inflation hurt the poor more than the rich or vice versa.

Researchers at the Bureau of Labor Statistics did such an exercise for the period 2003 -- 2018. We wanted to focus on the price increases for the eight high-level categories in the CPI-U, using inflation data for June 2022, although inflation has moderated somewhat since then, but remains very high, since we don't have access to the detailed data used by the BLS researchers. The idea was to see if low-income households spent more on food and beverages and transportation categories with very high rates of price increase than their high-income counterparts and therefore were hurt more by the current bout of inflation.

Spending data comes from the 2020 Consumer Expenditure Survey, CEX, which reports annual expenditures by income quintiles. The CPI and CEX categories don't quite line up perfectly, but with a little rearrangement, it is possible to fit most of the CEX spending into one of the CPI bins. Savings for Retirement is a major exception, which includes contributions to Social Security and other retirement plans and does not correspond to anything in the CPI basket of goods and services. This category shows the expected pattern that higher income households save more - see Figure 1 OK, you ignore the retirement-contribution component of CEX expenditures and simply look at how the rest are distributed among the CPI categories. Mechanically, that exercise is easy to do as described in our issue brief. What you find is that the spending patterns of low, middle and high-income households look quite similar. All households spend almost 15% of their budgets on food and beverages, 38% -- 42% on housing and 16% -- 20% on transportation. Other categories also look quite similar, see Table 3 As a check on our methodology, it is not surprising that the inflation experienced by the three groups looks very similar to Table 3 As a result of the similarity in spending patterns, we used our crude procedure to replicate the numbers from the BLS study for 2003 -- 2018 The results are similar: the overall annual average increase is very close and the lowest-income households experienced higher inflation than the highest. The results are similar: the rich spend only 79% of their after-income taxes on items included in the CPI-U, while the poor spend 95%. The inflation experience of high- and low-income households is not that different from the items they purchase, but the low-income households spend almost all their resources on inflation-affected items while the high-income households spend a much smaller share on those items.

On the expenditure side, one could argue that the wealthy are less affected by current high inflation than the low income side. In a life cycle sense, savings are exposed to inflation when they are spent. Savers have time to adjust their consumption patterns in preparation for the eventual impacts, an advantage that is not available to those forced to spend today.