Inflation refers to the general increase in prices of goods and services over time. It is measured by the Consumer Price Index (CPI) which tracks the change in prices paid by consumers for a basket of goods and services. Inflation reduces purchasing power and puts pressure on households, especially those on fixed incomes. With inflation at a 40-year high in many countries, there are growing concerns about who will be most impacted. This article will examine the groups likely to suffer the most from high inflation.
What is driving the current inflation?
The current bout of high inflation has been driven by a combination of factors:
– Pandemic disruptions – The COVID-19 pandemic severely disrupted global supply chains and led to shortages in many goods from cars to electronics. With demand outpacing constrained supply, this has driven prices up.
– Russia-Ukraine war – The war has led to sharp increases in food and energy prices. Russia and Ukraine are major global suppliers of commodities like oil, natural gas, and wheat. Sanctions and export disruptions have reduced supplies leading to higher prices.
– Stimulus spending – Generous stimulus checks and enhanced unemployment benefits during the pandemic put more disposable income in people’s hands. This boosted demand and contributed to inflationary pressures.
– Labor shortages – Persistent labor shortages, especially in low-wage sectors like restaurants and retail, have forced employers to raise wages to attract and retain workers. These higher business costs are passed on as higher prices.
– Profit margins – Some analysts believe that in the face of supply shortages, companies have taken advantage to pass higher input costs to consumers while also increasing profit margins. This exacerbates inflation.
Who suffers the most from high inflation?
The impact of inflation is usually not distributed evenly across income groups and demographics. Some segments tend to suffer more than others. Here are the groups most negatively affected by high inflation:
Low-income households
Those with the lowest incomes suffer the most from inflation. Three key reasons:
– A larger share of their budget goes to non-discretionary essentials like food, housing, transportation, and utilities which see some of the biggest price jumps during inflationary periods. Affluent households spend a smaller portion on such essentials.
– They have little savings and disposable income so higher prices rapidly eat into their limited purchasing power. Wealthier households have savings buffers against inflation.
– Their incomes are least likely to rise with inflation. High-income earners tend to see wages and salaries rise with inflation. Those in minimum wage jobs or on fixed incomes do not get similar income boosts.
Fixed-income households
Retirees, people with disabilities, and others on fixed incomes also suffer disproportionately. When inflation rises rapidly, the purchasing power of those on Social Security, pensions, or disability payments erodes quickly since those incomes remain flat. Even the recent 8.7% cost-of-living adjustment to Social Security payouts for 2023 will likely fall short of actual inflation.
Savers
People with significant savings see the real value of those savings decline with inflation, especially when interest rates do not keep pace with rising prices. This represents a stealth tax on savings in inflationary times.
Renters
Rents have been rising sharply across the US, far outpacing overall inflation. This squeezes renters who are more likely to have lower incomes than homeowners already. According to Apartment List, median US rents rose 14% in 2021, the highest annual increase on record. Rent inflation hurts renters’ ability to afford other basic necessities.
Indebted households
Those carrying significant consumer debt like credit cards, auto loans, and variable student loans can get squeezed as their debt burdens increase when the Fed raises interest rates to fight inflation. New borrowers also face higher interest costs. Overall, high inflation compensates debtors (through lower real debt burdens) at the expense of savers and fixed income groups.
Which demographic groups are impacted the most?
Among different demographic cohorts, these groups tend to suffer the biggest hit from high inflation:
1. African Americans and Hispanics
Minority groups are more likely to have lower household incomes, rent rather than own their homes, and have jobs lacking inflation-protection. Hence they tend to bear the brunt of inflation’s impact.
2. Women
Women are generally in more economically vulnerable positions. A gender pay gap persists with women earning lower incomes compared to men on average. Women also represent a larger share of minimum wage employees. Hence inflation erodes women’s earnings and consumption power more significantly.
3. Young adults
Younger adults tend to have lower starting salaries, smaller savings, and are less likely to own homes. Inflation cuts into their limited purchasing power and delays their ability to build savings and make big purchases like cars, homes, and further education.
4. Families with children
Raising children is expensive so inflation in child-related costs like food, clothing, child care etc. disproportionately burdens families with children. Single parents tend to feel the impact more harshly.
5. Older dependents
Those providing care and living expenses for non-working older dependents like parents face higher inflation costs impacting more people on a limited fixed budget.
How does high inflation impact standards of living?
High inflation severely impacts standards of living, especially for lower- and middle-income groups:
– Less discretionary spending – Non-discretionary essentials take up a bigger chunk of household budgets leaving less for discretionary purchases and quality of life enhancements.
– Lower savings and wealth accumulation – Higher prices outpace income growth reducing ability to save and build wealth delaying major purchases and life goals.
– More debt and financial distress – Struggling households take on more credit card and other high-interest debt to maintain lifestyles leading to debt spirals and bankruptcies.
– Poorer health outcomes – Essential medical care and healthy food get cut first by financially squeezed households leading to untreated conditions.
– Social costs – Economic stress leads to societal problems including higher crime, domestic abuse, mental health issues, and political extremism.
– Inequality – Wealthier households better maintain living standards increasing inequality during inflationary periods.
How can households protect themselves from inflation’s impact?
Though challenging, some protective steps households can take against inflation include:
– Seek additional income sources through freelancing, side-hustles, part-time jobs, etc.
– Reduce discretionary spending and develop a tight, essentials-only budget.
– Shop aggressively for deals, buy in bulk on discounts, minimize food waste, and meal plan.
– Lower large recurring bills like insurance, internet plans, gym memberships by renegotiating contracts or downgrading services.
– Pay down adjustable rate debts like credit cards to avoid escalating interest costs.
– Refinance fixed mortgages and student loans to lower rates before interest rates rise further.
– Shield savings in inflation-protected assets like I-Bonds, TIPS, equities, real estate, and commodities.
– Delay large purchases until inflation cools to get more for your money later.
What can the government do to ease inflation’s burden?
Policy options available to the government to reduce inflation’s impact on vulnerable groups include:
– Provide new targeted relief like stimulus checks, nutrition assistance, utility subsidies, and gas cards.
– Expand Social Security benefits and adjust them faster to inflation.
– Raise minimum wages indexed to inflation so lowest incomes better keep pace with rising prices.
– Invest in affordable housing, child care, and elder care to lower costs in major household expense categories.
– Provide back-to-work support like job search help, retraining opportunities and child care. A tight labor market with plentiful jobs empowers workers to demand raises.
– Lower taxes and tariffs on key imported goods to ease shortages and lower prices.
– Regulate monopolistic sectors like energy, agriculture, and pharma to restrict unwarranted profiteering during supply shocks.
Conclusion
High inflation exacerbates inequality as vulnerable groups with limited incomes and savings bear its heaviest impact. Low-income households, minorities, single parents, women, younger workers, families with children and seniors on fixed incomes tend to suffer the most from rising prices eroding standards of living. While the Federal Reserve’s interest rate hikes aim to tame inflation long-term, targeted near-term government relief and policies to boost jobs and wages can help ease the inflation burden on those struggling most. With wise solutions, the damage from inflation across society can hopefully be contained.
Key inflation statistics
| Inflation measure | Latest rate |
|---|---|
| Headline CPI (all items) | 8.2% (Sep 2022) |
| Core CPI (excl. food & energy) | 6.6% (Sep 2022) |
| Food inflation | 11.2% (Sep 2022) |
| Energy inflation | 19.8% (Sep 2022) |
| New vehicles | 8.2% (Sep 2022) |
| Shelter inflation | 6.6% (Sep 2022) |
| Services inflation | 6.1% (Sep 2022) |
| Producer Price Index (PPI) | 8.5% (Sep 2022) |
These latest inflation readings show prices rising at multi-decade highs across most spending categories. Energy and food costs are up sharply, squeezing household budgets. Core inflation excluding volatile food and energy remains stubbornly persistent indicating inflation is broad-based. Producer price inflation signals continued pipeline pressure on consumer prices.