My Two Cents

Inflation Inequality?

Chris Farrell Jul 9, 2008

Income inequality has worsened ovre the past three decades or so. Economists in the Global Economics Research area of UBS recently took a look “inflation inequality.”

Two results aren’t surprising. The top income group is the least likely to suffer from rising prices. Low income Americans since 2000 have seen their price index rise by over 7% more than higher income American consumers.For the low-income it’s food and healthcare, as well as utilities and heating bills, that are the drivers behind inflation pressures.

So far, no real surprise. What’s different, the economists argue is that “this time the middle class in America is sharing inflation ‘pain’ with lower income groups.”

But the force behind middle class inflation is different from lower class inflation. For the middle class, gasoline is the big culprit. Call it the price of an SUV culture. Middle class families also have greater room to manuever for financial relief:

The damage to standards of living for middle-income families is not entirely clear, however. The middle-income family has scope to change their consumption habits in a way that lower-income groups do not. In economic parlance, middle-income families have price elasticity as to their demand. A middle-income family has a choice of where to shop for food, for instance, and may prefer to substitute own-label products, or discount stores, to maintain their standard of living, but pay less to do so. Rather than buying premium grades of petrol, the middle-income family could chose to maintain their mileage, but downgrade the fuel used.

The UBS economists add that the trends they’ve highlighted are true across the OECD.

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