Do the poor face higher inflation?

HIGH INFLATION is hard to escape, with essentials like household energy bills and food soaring in price. In Britain the consumer-price index was 9% higher in April 2022 than it was a year earlier, the highest rate in 40 years. In that same month Americans suffered a rate of 8.3%, with food and energy prices rising by even more. Although prices are rising for everyone, there is extra reason to worry about those in or close to poverty. Not only did benefits and the state pension in Britain rise by a mere 3.1% in April, the headline inflation figures are merely averages. Are the poor facing higher inflation rates than the rest?

Statistical agencies calculate inflation by looking at how people allocate their spending across all manner of goods and services, from food and energy to holidays and internet access. They then use those shares of each category as weights when calculating the average rate at which prices change. As the rich tend to spend most, the weights will more closely reflect their spending patterns than those of the poor. And if the poor tend to spend a higher share of their income on products that are becoming more expensive particularly quickly, their experienced inflation rate will be higher than the headline figure suggests.

Relying on differences in spending patterns alone, it does look like since 2005, inflation in Britain has been slightly higher for the poorest. Analysis by the Office for National Statistics (ONS), a government agency, suggests that between the beginning of 2005 and the end of 2021, prices rose at an annual average rate of 2.8% for the poorest 10% of households, compared with 2.5% for those in the middle of the income distribution and 2.6% for the richest 10%. The inequality was greatest at around the time of the global financial crisis and in the early 2010s, but after 2014 pretty much disappeared.

Before this April, the spending habits of the rich and poor meant that they were being squeezed alike. The poor spend a higher chunk of their income on heating bills, which rose last October, but the rich spend more on petrol, the price of which has also surged. But according to Heidi Karjalainen and Peter Levell of the Institute for Fiscal Studies, a think-tank, that changed in April when the prices of gas and electricity in Britain rose at annual rates of 54% and 96% respectively, because of a rise in the price ceiling set by the country’s energy regulator. That thwacked the poorest tenth of households particularly hard, putting their inflation rate up to 10.9%. For the richest tenth, meanwhile, the rate is 7.9%.

The difference could be even bigger. Official estimates of inflation assume that the poor and rich face the same price changes for the products they buy. But that may not be the case. For example, budget brands tend to be priced closer to their costs. As those costs go up, either because of disrupted energy markets, Brexit, or Russia’s invasion of Ukraine, these products’ retail prices could rise more quickly than those of premium brands, on which margins are fatter.

There is some evidence that in America, at least, these differences matter. A study by Greg Kaplan of the University of Chicago and Sam Schulhofer-Wohl of the Federal Reserve Bank of Chicago examined detailed measures of spending in retail outlets between 2004 and 2013, which accounted for around 30% of household expenditure. They found that the gap between the annual inflation rates of the poorest and the richest was just 0.1 percentage points when they measured using average price changes, but 0.6 points after accounting for differences in the prices that people truly faced for the same types of goods.

For now, one of the few good features of the inflation surge is that it is generating pressure to improve measurement. In early May America’s National Academies of Sciences, Engineering, and Medicine, the chief professional bodies of those disciplines, called on the Bureau of Labour Statistics to publish inflation by income. The ONS is upgrading its measurement of food prices, to capture a broader set of product ranges. Even without that extra information, though, there are already grounds to worry particularly about the poorest.

More from The Economist explains:
How does America calculate inflation?
Why don’t rising house prices count towards inflation?
What underlies fear of inflation in America and Europe?