Economists warn of inflation inequality as poor get slammed by rising prices

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  • An analysis by the Penn Wharton budget model found that low- and middle-income households spent about 7% more in 2021 for similar products purchased in 2020 or 2019, averaging about $3,500.
  • Experts now fear poverty will rise in early 2022 as pandemic-related federal benefits run out and President Joe Biden’s sweeping social spending package expires in Congress.
  • There’s a bright spot for low-wage workers: Average wages in November jumped more than 5% for the lower quartile compared to a year ago.

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Economists warn that the coronavirus pandemic has led to a new era of inflationary inequality, with poor households bearing the brunt of rising prices.

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This is because a substantial portion of their budget goes towards categories whose costs have gone up. For example, food is up 6.4% over the last year, while gasoline is up 58%. And now many people are facing those higher prices as federal stimulus programs fade.

“They essentially want to extend a dollar most days,” said Chris Wimmer, co-director of the Center on Poverty and Social Policy at Columbia University. “It’s going to lead to difficult choices between putting gas in the car or paying for child care for your kids or putting food on the table.”

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A recent analysis by the Penn Wharton budget model found that low- and middle-income households spent about 7% more in 2021 for similar products purchased in 2020 or 2019. This translates to about $3,500 for the average household.

In contrast, the spending of wealthy households increased by only 6%.

Change in spending for the rich

Kent Smeters, who directed the Penn Wharton model, said this disparity is typical during periods of inflation. But since the 1980s – the last time prices rose so sharply – high-income households have shifted much of their spending away from goods and toward services. For example, in 2020, food for the top 5% of households accounted for 12.7% of the budget, while for the bottom 20% it was 16% of the budget.

Meanwhile, production disruptions related to the pandemic have pushed up the cost of the items on which poor families depend.

“What they buy is made hard by the lack of supply,” Smeters said. “It’s broader-based than in the past.”

The findings coincide with an analysis of credit and debit card data by Harvard Business School economist Alberto Cavallo at the start of the pandemic. They showed that low-income consumers experienced price increases that were almost twice as high as those of wealthier people.

In 2019, a joint paper by researchers from Columbia and the London School of Economics estimated that nearly 3 million more people would be able to live in poverty if their incomes were adjusted for the inflation rates they experienced.

Experts now fear poverty will rise in early 2022 as pandemic-related federal benefits run out and President Joe Biden’s sweeping social spending package expires in Congress. Of particular concern is the end of monthly payments of the child tax credit, which provides families with $300 per month for each child under the age of 6 and $250 for older children.

Worry about ending tax credits

According to Colombia, this benefit kept nearly 4 million children out of poverty. The last monthly check was issued on December 15.

“You see a very clear impact of those payments,” Wimmer said. “We’re all obviously worried about January.”

But Republicans fear the exact opposite: that more money from Washington would lead to even more inflation, placing a greater burden on the poor.

“There are some provisions in this bill that maybe we can have a bipartisan settlement once inflation calms down,” said Sen. Lindsey Graham, R.C. told reporters earlier this month. “But now is not the time to add any more federal spending, increase government, create inflationary problems.”

This argument seems to have influenced Sen. Joe Manchin, DW.VA, who has raised the alarm about the cost of the child tax credit if it were continued into the decade. He has emphasized stricter limits on benefits and work requirements for other social programs in the package. Without their vote in an equally divided Senate, Democrats cannot pass the bill.

“There is a case to be made that tax credits are a must – if we weren’t dealing with inflation, it’s certainly a way to support the underprivileged,” said Gustavo Flores-Macias, an associate professor at Cornell University. “But political timing is bad because of inflation.”

There’s one bright spot for low-wage workers: They’ve received some of the biggest wage increases of the pandemic, helping to stem price increases. According to the Federal Reserve Bank of Atlanta, as of November, the average wage increase over the previous year has been more than 5% for the lower quartile. Meanwhile, the average salary increase for the top 25% has come down to just 2.7% as of November this year.

“This is not a crisis of scarcity. It is a crisis of exceeding the market supply that everyone has,” said Samuel Hammond, director of poverty and welfare policy at the Nisken Center. “If we want strong economic growth, we will probably have to endure high inflation and rising commodity prices as a side effect of accelerating consumer spending and investment.”

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