Something unexpected happened during the burst of inflation that came on the heels of the pandemic: Poorer Americans experienced a bit less of it than others.
It looks as if it was only a momentary reprieve, and the decadeslong trend of prices rising faster for poor people than the better off might have resumed.
Nonetheless, new research sheds an important light on how different income groups experience inflation. One implication: Traditional measures might understate poverty and inequality.
Inflation is often treated as monolithic. The Labor Department’s Bureau of Labor Statistics surveys consumers to create a basket of the average American’s monthly purchases, which is the basis of the consumer-price index. Most people experience a different inflation rate from what the CPI shows, though. For example, parents living next to an otherwise similar family might have longer drives to work, and thus an inflation rate more swayed by gasoline prices.
It is often assumed that poor people face higher inflation because they spend more on essentials such as rent. Research released Sunday by Xavier Jaravel, an economist at the London School of Economics, shows that while this has generally been true, in the years after the pandemic began it wasn’t.
Using the same survey data used for the CPI, Jaravel constructed separate baskets for each income group. The methodology is similar to the BLS’s, he said. “When you do this, you find substantial inflation differences by income group.”
From May 2020 to May 2022, when the CPI rose 14%, Jaravel found that prices rose 13.5% for people in the bottom 10% by income and 13.3% for those in the second decile from the bottom, and 13.5% in the top decile. But prices rose more for groups in between—by 14.8% for the sixth and seventh deciles.
The biggest drivers of the divergent inflation rates were gasoline, up 132% in that period, and new and used vehicles, up 30%. As a group, poor people devote less of their spending to cars and gasoline and more to public transportation.
Even within income groups, inflation varies. Some poor people, such as those in rural areas with long commutes and no access to public transit, almost certainly experienced significantly higher inflation rates than other poor people following the pandemic’s start. Moreover, with less of a financial cushion, the poor can find inflation harder to negotiate, and more stressful. But one broad, encouraging takeaway from Jaravel’s analysis is that lower-paid workers received outsize wage gains right after the pandemic hit, which might have given them even more spending power.
Since 2022, however, the script has flipped. Gasoline prices have fallen, vehicle prices are edging lower, and inflation is now higher for lower-income than other groups. Over the four years ending this past May, lower-income Americans still experienced fractionally lower rates of inflation than the middle class, but not the top 10%.
Jaravel’s data show that in any given year, inflation for the poor tends to be a bit higher than for other people because more of their spending is on items that have risen faster than the overall CPI over time, such as rent, electricity, and tobacco products, and less on items that have risen more slowly, such as vehicles and airfares.
“These things accumulate over time,” he said. For example, for Americans living at the 25th percentile by income, prices rose by 82% from the start of 2002 to the end of last year. That compares with 74% for those at the 75th percentile.
This means the buying power of the poor rises more slowly when measured by their own—instead of the overall—inflation rate. Jaravel estimates that if the Census Bureau used its income-level price indexes in the period beginning in 2002, rather than the overall CPI, 2.3 million more people would be below the poverty line in 2023 than its official figures show.
Katharine Abraham, a University of Maryland economist and former BLS commissioner, said a lot of current work in economics is devoted to measuring the distribution of income, wealth, and consumption. Jaravel’s research “is saying you can’t really understand all of that without also thinking about the prices people are paying,” she said.
The research builds on work by others, including BLS economists. Unlike that work, Jaravel can update his indexes as inflation data come out each month.
The aggregate inflation data now produced by the BLS and Commerce Department is still necessary for measuring economic growth in inflation-adjusted terms. But “if you are going to look at the well-being of different parts of society and different groups…you should have different price indexes,” said David Johnson, an economist at the National Academies of Sciences, Engineering, and Medicine who was assistant BLS commissioner overseeing the CPI.
Figuring out how policy should respond to those differing inflation experiences would be tricky. Should poverty benefits be indexed to the inflation rates of the poor? What about Social Security benefits or military pensions? But the questions can’t even be asked, much less answered, without the sort of data Jaravel has produced.