The impact of different inflationary pressures due to income inequality and racial disparities in the United States today
The Federal Reserve Bank of Minneapolis recently hosted a conference, “Unequal Inflation Impacts,” at which an illuminating set of presentations and additional research sources explored “the ways inflation puts different pressures on workers and families depending on where they live, what they earn, and how they spend” in communities across the United States. For scholars and policymakers interested in the complexities of this topic, I highly recommend the video presentation of the event, alongside the entirety of the resource materials provided by the regional Federal Reserve bank’s Opportunity and Inclusive Growth Institute.
Three of the presentations stood out for me because of how they highlight that the headline inflation number followed so closely fails to capture the full experience of inflation. Just as growth in the Gross Domestic Product fails to describe the fortunes for the vast majority of Americans, the Consumer Price Index fails to capture the diverse experience of inflation.
One of those presentations was “Price Volatility Faced by Black and White Households,” presented by economists Munseob Lee at the University of California, San Diego and Claudia Macaluso and Felipe Schwartzman at the Federal Reserve Bank of Richmond. The second was “Cost of Living Inequality beyond the Great Recession,” by economists David Argente at Pennsylvania State University and UC San Diego’s Lee. And the third was “Differences in Rent Growth by Income Between 1985 and 2019 and Implications for Inflation,” by Daryl Larsen at the University of British Columbia and Raven Molloy at the Federal Reserve Board of Governors.
Let me briefly summarize each of these presentations before discussing why their findings are particularly important amid today’s inflationary pressures. All three of the presentations and their underlying research may help researchers and policymakers better understand the dynamics of consumption volatility among different groups of U.S. workers and their families.
The key takeaway in Lee, Macaluso, and Schwartzman’s “Price Volatility Faced by Black and White Households” is the finding that Black households face more frequent price changes and less certainty in those prices than White households. Specifically, a good consumed by a Black household changes price once every 8.07 months, compared to once every 8.51 months for a White household.
“The differences, while not overwhelming, are not trivial either,” they find. “If prices paid by White households increase by 7 percent over a year, our calculations suggest that one may expect them to increase by 7.5 percent for Black households,” the co-authors conclude. They then note this difference “informs the trade-off between inflation and unemployment stabilization for White and Black households.”
For policymakers in particular, the co-authors say their findings imply “that when evaluating trade-offs between inflation and unemployment, one ought to keep in mind that the costs of inflation may be borne disproportionately by the more disadvantaged group.” This exhortation applies to unemployment, not just inflation, as the unemployment rate for Black individuals is higher, too. The members of Federal Open Market Committee should consider these disparate impacts when debating future interest rate changes.
Argente and Lee’s “Cost of Living Inequality beyond the Great Recession” offers a detailed look at the impact of inflation on the real incomes (after adjusting for inflation) of U.S. households across different income groups. The time period of their research on household expenditures by income group—from prior to the onset of the Great Recession through 2019—was marked by very limited inflationary pressures in the U.S. economy. Yet, even so, they find that “inflation disparities across income groups have been relevant over the last 15 years in the consumer goods sector,” with the worst outcomes for households with earnings below $50,000 a year.
What’s more, the two co-authors find that the gap between this income inequality as it relates to inflationary pressures “moves closely with the unemployment rate in the United States.” They add, however, that “in the aftermath of the Great Recession and before the COVID-19 pandemic, low-income households were able to reduce the prices they paid for identical goods relative to prices paid by high-income households through their shopping behavior.” Amid the current bout of inflation, this may no longer be so easy to do for low-income households.
Their policy takeaway? Amid the continuing COVID-19 pandemic, they note that as prices increase for necessities, such as groceries, expenditures on luxury goods can often be postponed but “expenditures on necessities cannot, and they account for a large share of the consumption of low-income households.” They also note that “high-income households are more likely to adjust their shopping behavior by taking advantage of new technologies, such as e-commerce, that enable them to find lower prices.”
Larsen and Molloy, in their presentation “Differences in Rent Growth by Income Between 1985 and 2019 and Implications for Inflation,” zero in specifically on inflationary pressures in U.S. home rental markets. Securing a roof over one’s head is a major household expenditure and accounts for 30 percent of spending in the Consumer Price Index, they note. They investigated changes in housing costs over time among households up and down the income ladder and how those households vary their spending on housing based on rental housing inflation.
Offering a number of caveats based on the limitations of their data analysis and the need for further research, the co-authors find “that differences in rent growth and the fraction of expenditures devoted to housing have not led to material differences in [housing] inflation across income groups over the past three decades.” This finding is in contrast with prior economic research. They attribute their contrary findings to “geographic differences in housing costs [that] overstate the differences in rent inflation faced by households in different income groups.”
Their most telling takeaway for policymakers is how their findings relate to income inequality across communities among different income groups. They note that as “lower-income households respond to rising rents by moving to less expensive locations, the average rent paid by this group will put a growing weight on lower-rent areas while the average rent paid by high-income households will put a growing weight on higher-rent areas.” These differences across groups in average rent paid can increase, they add, even though rental inflation by geography growth does not.
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These three presentations do not fit neatly into a summation of all the different inflationary pressures facing U.S. workers and their families due to income inequality and racial disparities. Yet, taken together, they do highlight where policymakers need to concentrate their focus and where further research is needed. Both efforts will be critical as the U.S. economy grapples with inflationary pressures and the Federal Open Market Committee continues to raise interest rates this year.
Indeed, there are immediate issues at hand for the Fed. Jacob Orchard, a Ph.D. candidate in economics at the University of California, San Diego and a 2019 Equitable Growth grantee, in his new working paper, “Cyclical Demand Shifts and Cost of Living Inequality,” models pricing pressures on household goods and finds that due to inflation, “low-income households are hit twice by recessions: once by the recession itself and again as their price index increases relative to other households.”
In good news, pressure is building for an inflation measure that captures these differences. The National Academies of Sciences, Engineering, and Medicine issued a recent report detailing ways to modernize inflation, including producing different inflation by income level.
And then, there are more medium- to long-term questions to be answered about inflation and its links to consumption inequality and the stratification of economic mobility among U.S. workers and their families due to income, race and ethnicity, and gender. In my recent work with National Academies economist David Johnson, University of Wisconsin economist Tim Smeeding, and Federal Reserve Bank economist Jeff Thompson, we look at consumption inequality since 1989 and consumption by race.
What we find is that consumption inequality increased after the Great Recession of 2007–2009. This may understate inequality growth if low-income households face a higher inflation rate because their money does not go as far, and also may overstate the well-being of Black households even though they are already disproportionately in the bottom of the consumption distribution because they face higher inflation. Factoring in rising inflationary pressures in today’s U.S. economy will be an important piece of future research.