Who is inflation hurting and what to do about it?
Tomorrow we get data on consumer price inflation in October. It's useful information on our economic recovery, but the totals obscure the many differences across families.
Source: #macromom’s fridge. Got milk and beet balls. YUM!
Today’s post is about inflation and how it’s affecting high- and low-income families. But, first, let’s remember Covid is the true enemy, not inflation:
“A study of 37 countries and territories in the journal BMJ found the pandemic was a killing field in most places. More than 28 million years of life were lost in 2020 across 31 of them, with Russia, Bulgaria, Lithuania, the United States, and Poland recording the heaviest toll.
The number of years of life lost due to Covid-19 was more than five times greater than those lost from influenza in 2015, during the worst seasonal flu epidemic since the turn of the century.”
Moreover, the study found that U.S. life expectancy has fallen by two years so far in the pandemic. Economic hardship today is real, but no amount of money in the world can bring back the loved ones lost to Covid. #RIP #GetVaxxed.
Another reality is that it costs money to keep a roof over your head, food on the table, gas in the car, and your family healthy. In our deeply unequal country, how much of a family’s income it takes to buy necessities varies greatly between rich and poor.
For families with income at the bottom, these necessities account for over 80% of all their spending versus 65% for families at the top.When prices of these goods and services go up, it especially squeezes the budgets of low and moderate-income families, leaving less for everything else.
Even so, we should be cautious when using the spending of specific families to drive conversations about inflation: context, people. No one likes to pay more for something at the store, but if you have more income too, it’s not a problem that’s getting worse.
This CNN interview was a hot mess on many levels. They talked with a family about how much they are spending on milk. Yes, milk. It led to a Twitter meltdown. Sigh.
There’s a lot to get riled up about in that clip. New organizations, please use FRED to do fact checks. My main complaint was the narrow coverage of their grocery bill. The interview totally ignored the extra income support the family is getting this year. The new Child Tax Credit for this family with nine kids totals at least $2,250 per month and adds to their $15,400 in stimulus checks in March. Together, this money must exceed the higher cost of milk and the other things they buy. Again, context.
We make other mistakes by looking at aggregate statistics like the Consumer Price Index and then assuming it applies the same to everyone. Of course, it matters what’s in your ‘shopping cart’ to exactly how much your cost of living is increasing. If you didn’t have to buy a car this year, your inflation is less than the national total. It also matters a lot how much is in your bank account.
Spending by the lowest 20% of families by income is 11% of all spending on groceries, alcohol, and restaurants in the United States. For the top 20%, it’s 33% of the total.Moreover, the top, on average, spends over $1,000 per month on eating and drinking, which is about 3 times as much as the bottom. It’s nearly impossible that they are eating three times as much. Can you guess who pays higher prices?
The wealthy. That 4.6% in grocery prices during the past year tells us more about rich people’s bills than poor people’s. Yes, most Americans are paying more, sometimes a lot more, than before the pandemic. But the CPI is not telling the whole story. The connection between that number and the economic well-being of people is not as tight as some pundits make it sound. And talking about inflation without mentioning income, especially the extra relief during the crisis, is even more misleading. Our policy debates must center on people and reality.
Tomorrow, the Consumer Price Index will likely show that inflation moved back up after months of stepping down. I am not happy about it. Last month we added over a half-million jobs. I am happy about that. And I know we need better.
The Covid economic crisis has been a roller coaster, a horrible ride we are still on. Higher-than-normal inflation this year as we come out of a global pandemic and through a messy recovery—especially after years of low overall inflation—is not a reason to panic. The Fed is not panicking. It is being vigilant. That’s a lesson for us all. Be vigilant and stay safe.
The best way to help struggling families now is to get vaccinated. The best way for Congress to ease economic hardship is to pass the ‘kids, care, and climate’ legislation. Keep the child tax credit coming to that family with nine kids and millions of other families. Help support better pay and working conditions for low-wage workers. That’s how you make life better for families, all of them.
Please consider financially supporting my Substack with a paid subscription. You will help me to write regularly about economic policy. You will also receive some paid-only posts.
Bonus: the Fed in the news
The employment report for September was unambiguously positive, with over ½ million jobs added and strong wage growth. Even so, It does not change Powell’s assessment at the FOMC press conference that we were far from maximum employment. We made a solid and welcome step toward it.
At this point in the policy cycle, the Fed could not be more different now than during the recovery from the Great Recession. It’s a new Fed. In 2020, it raised the bar on its maximum-employment mandate by adding “broad-based” and “inclusive” goals. Examples abound, Powell in the opening remarks on a Fed conference on Monday about gender, spoke about how the pandemic widened deep-rooted inequities in our economy, particularly among mothers. It reinforced his comments at the presser that we need to have “humility” about what the labor market looks like after Covid. He cited the effects on caretakers who left their jobs during the pandemic as an area of concern. Truth!
Now that the Fed is slowing its asset purchases, all eyes have turned to when it will raise rates. On Monday, Vice-Chair Rich Clarida missed an opportunity to explain the Fed’s current thinking on “broad-based” and “inclusive.” Instead, he suggested the national unemployment rate is good enough since it’s correlated with the other aggregate indicators he looks at. No way is that sufficient. The Fed must start ‘showing its work’ and explain its metrics for success.
Chatter from the White House is clear. Jay will likely be Chair and Lael Vice-Chair. (And Lael Chair in four years.) With Randy Quarles’s resignation, President Biden now has five appointments. That’s a huge opportunity to put the leaders at the Fed who will see the new framework through and support a recovery for all people. I fully expect at least one of the five appointments to break my heart. Jay and Lael together at the top will make up for it.
These data on spending by income are from the Consumer Expenditure Survey at the Bureau of Labor Statistics. The survey is also used in the estimates of the Consumer Price Index. It is conceptually different than Personal Consumption Expenditures in GDP. Basically, the household survey asks about out-of-pocket expenses. The national accounts also include indirect spending like Medicare reimbursements for healthcare. As a result, the total spending in the household survey is about one-half to two-thirds of total spending in the national accounts. Research by William Passero, Thesia I. Garner, and Clinton McCully (2015) shows that the estimates are mostly similar where the two measures overlap in concept.
Most striking is the vastly different share of families’ budgets that goes toward housing. The lack of affordable, high-quality housing in the United States is a crisis that’s been intensifying for decades. The ‘kids, care, and climate’ legislation in Congress now would allocate hundreds of billions of dollars to housing.
If spending were equal each income quintile would account for 20% of total spending. It’s not equal not even close. In addition, it’s very hard to survey the highest-income households, so their share of spending at the top is likely even higher than these estimates.
It is depressing that so much of the discussion of inflation (except here, of course) takes as a given that the pandemic is over. The deaths of 100,000 people in the US over the past two calendar months is going to impact economic indicators and the upcoming wave will do so as well. To quote Bill Gates from last spring, ''You can't ignore the pile of bodies in the corner and return to normal."
With a very broad brush, inflationary forces hurt people on fixed incomes, retirees; and also, working-people who have little debt, but keep their assets in Working-Capital, like cash, or inventories of goods & supplies that are used regularly.
Also, people working at institutions, whereby, the structure of the job, there may be little bargaining-power in the hands of the worker to ask for, and get, a cost-of-living increase.(non-organized labor situations)
It is important to note those people who benefit by inflation over the longterm. Those are people who hold long length-to-maturity debt such as fixed-mortgages, some business-loans, student loans....and hold little cash, these folks will see the Real cost of their monthly loan payments, and also the Real value of the principal that they owe, inflated away over time.
Depending upon how the Fed and other financial regulatory authorities handle inflation, will determine the length and depth of its impact on the groups effected the most.