Poster Paper: The Unintended Effects of Inflation on Lower Income Households

Saturday, November 9, 2019
Plaza Building: Concourse Level, Plaza Exhibits (Sheraton Denver Downtown)

*Names in bold indicate Presenter

Amy Higgins, Federal Reserve Bank of Boston

When examining larger macroeconomic issues and policies it is often the case that policy goals and measures of success are viewed through a high-level aggregated lens. This way of thinking yields singular policies intended for heterogeneous populations. While the majority of the population may be beneficiaries of such macroeconomic policies, there is usually a sub group of individuals that do not benefit or respond in the same manner as their counterparts. It is important to identify and understand the effects and experiences of this sub group, not necessarily to change the field of macroeconomics, but rather build more efficient and targeted social and public policies to mitigate any unintended negative effects associated with macroeconomic policies. The purpose of this research seeks to understand the effects of inflation on lower income households. Inflation is measured by the average price changes that occur within a standardized basket of goods and services that the average household purchases. However, not all goods and services experience the same price changes at the same time. This fact is important to note when studying the effects of inflation on sub-populations, such as lower income households because based upon household income levels, the basket of goods and services purchased can vary, and the percentage of income spent on each item can differ. This potentially can be problematic to poorer households. For example, since the inflation rate measures the combined effects of all price changes, if price increases are concentrated in necessity items such as food at home, lower income households, which allocate a larger share of total expenditures to these items relative to higher income households, will disproportionately be affected. Essentially when looking at household expenditures by total household income, households can experience different levels of inflation in the same economic environment. Hence, inflation can act as a regressive tax on the poor because the ratio of the additional percentage in price increases versus overall income, is greater for lower income households versus higher income households. it is important to study the effects of inflation on lower income households’ financial well-being and the potential unintended consequences of inflation centered policies. While reviewing much of the literature regarding the effect of inflation on lower income households, several gaps exist. One notable gap within the literature is that in all models, it is assumed that all households experience the same rate of inflation. This is an unfair assumption since lower income households’ budgets differ substantially from average households. Therefore, there is a need to better understand how to measure the inflation rate experienced by lower income households. Using data obtained from the Bureau of Labor Statistics (BLS) Consumer Expenditure (CE) survey I plan to expand upon the current research by accurately determining the inflation rates experienced by households of different income levels. This measure will then be compared to the traditional inflation rate by income level, with differences tested for significance. Implications of these findings will be discussed in relation to its effect on the value of welfare assistance adjustments.