As Politicians Continue to Bicker About Inflation, Those on the Bottom Suffer
Updated: Mar 23
New data released on February 10 by the U.S. Bureau of Labor Statistics revealed that the Consumer Price Index (CPI) had increased 7.5% over the last 12 months. The increase marks the most significant year-to-year jump in the past four decades since 1982 when the U.S. was recovering from an economic recession. The CPI has traditionally been used to measure inflation and measures the changes in prices of a "market basket of goods" that represent the spending of households on certain goods and services. Throughout the pandemic, inflation has slowly continued to rise, despite ongoing disputes, acknowledged by many along the political spectrum as a pressing issue. While inflation has brought negative consequences to many in the U.S.' recovering economy, new data has reflected that certain demographic groups are far more vulnerable to continued inflation than others.
Traditional thinking about inflation dictates that most people in a stable economy will be worse off due to inflation. This is because workers on fixed wages find that their dollars have less and less spending power as prices increase and their wages remain stagnant, a phenomenon known as "inflation shock." While President Biden has touted continued wage increases quarter to quarter, and wages indeed saw significant increases from 2021 to 2022, the unprecedented rise in inflation has led to a "real" loss of 1.7% in hourly earnings over the past year. According to the U.S. Department of Labor, a small but significant decrease of almost 20 cents per hour. The Department of Labor also reported that weekly earnings fell by an even steeper 3.1% in the same time frame, from 399 dollars to 387.
A research report from Bank of America breaks down the effects of inflation further by demographic and finds definitive answers as to who suffers the most from "inflation shock." BusinessInsider.com reported that the study concluded that inflation hit Black, Hispanic, and Latino communities the hardest. This is mainly because many of these groups find themselves more dependent on the types of goods that were impacted the hardest by inflation, namely, energy, food, automobiles, and household furnishings. For example, while all other demographic groups spent 5.4% of their income post-tax on energy, for Black, Hispanic, and Latino households, that number was 7.1%. The same groups spent 1.4% more on food as a percentage of after-tax income. Overall, researchers documented that the overall spending power shock, or the extent to which people have money to effectively spend on items after taxes, dropped 4% for these groups, and 2.9% for everyone else.
Those living in rural areas also felt the inflation shock harder than other demographic groups. As opposed to urban areas, families in rural areas are more dependent on the four categories of goods impacted the most by inflation. Seeing as how many rural areas are designed further spaced out and housing units are farther apart, there is an extreme dependence on automobiles and energy, which leads to a larger share of income being dedicated to inflation-prone goods. As a result, Bank of America researchers estimated that rural populations felt an inflation shock of 5.2% instead of 3.5% for urban populations. A similar trend was observed when looking at the education level. According to the Bank of America report, households without a degree-holding individual spent 34% of their income on inflation-prone categories. In comparison, households with a degree-holding individual had that figure at 23%.
Combining this data, the common denominator between these groups is that they tend to be lower-income households. This phenomenon underlies a more significant general problem with the pandemic – those who are better off economically have been able to recover and even thrive quicker than those at a lower economic status who have continued to struggle. Economists describe this type of economic recovery as K-shaped. A K-shaped recovery is characterized by specific segments of the economy experiencing a V-shaped recovery, which entails an economic decline followed by a sharp rise. In contrast, other segments suffer from an L-shaped recovery, characterized by continued slow growth. According to Investopedia.com, the recession caused by COVID-19 has also led to a wealth-based K-shaped recovery, where the wealthy can recover much quicker than lower-income workers. Part of the reason for this lies in the fact that the industries most immune to the effects of COVID-19 were those able to offer remote work opportunities. As a result, these industries, on average, tended to pay higher wages, such as the technology industry. On the other hand, it is estimated that only around 26% of low-wage establishments were able to offer remote options. As a result, during the height of the COVID caused the recession, low-income workers saw employment rates decline 24.4% more than those earning more than $60,000.
Adding to the chaos caused by inflation is the Washington debate on addressing the issue, as Republicans and Democrats continue to bicker as to who or what is to blame for inflation. President Biden has been criticized by many on the right for downplaying the threat of inflation, claiming in 2021 that any sort of threat of inflation would only be short-term. However, Biden recently reversed course, admitting on February 4 that "average people are getting clobbered by the cost of everything today."
Republicans have been highly critical of President Biden and Congressional Democrats, with accusations of inflating the money supply in the economy by pushing an agenda focused around high-price tag spending bills, including the 1.9 trillion American Rescue Plan Act and the 1.2 trillion Infrastructure Investment and Jobs Act, with President Biden currently looking to push the 1.75 trillion Build Back Better Act as well. Senator Mitch McConnell (R-KY) tweeted on February 10 following the release of CPI data, "This all-Democrat government was warned their radical agenda would supercharge inflation, and they pushed ahead anyway. Now, rampant inflation and soaring prices are crushing the American people."
Those on the left have pushed the idea that inflation has been caused by COVID-19 global supply chain issues, coupled with an unpredictable surge in demand for certain commodities. Democrats such as Senator Elizabeth Warren (D-MA) have also blamed large corporations for monopolistic behavior and high prices during the pandemic. Despite these explanations, new polls, including one from CNN, show that the public seems to blame the Biden administration, with 62% of voters disapproving of the President's handling of the economy. In addition, some Democrats, especially those projected to have tight reelection races come November, have become critical of the Biden administration. For example, Senator Mark Kelly (D-AZ) has vocalized that he is not satisfied with the administration's handling of inflation.
To try and ease some of the pain from inflation, the Federal Reserve is expected to raise interest rates in March, which has stayed low throughout the pandemic. The rise in rates is expected to slow the economy and hopefully help ease pressure on a recovering supply chain by alleviating some consumer demand. Despite all this, economists still expect inflation rates this year to be above the 2% threshold goal set by the Federal Reserve. It is hard to project what lasting impact the disparities caused by inflation will have on demographic groups affected disproportionately due to the number of unique factors surrounding the COVID-19 recession. For the foreseeable future, it is likely inflation pressure will only continue to mount on those who are prepared to handle it least.