The reason for this widening rich-poor inflation gap, known by economists as inflation inequality, comes down to the typical spending habits of people in each income group.

In times of economic uncertainty and recession, most households tend to hold back on buying luxury goods (pdf). But by and large, people can’t cut down on necessities such as groceries and heating—although wealthier consumers are better placed to stock up on these necessities when prices are cheap.

This shift of spending away from luxury items like vacations and new cars, and toward necessities, pushes inflation up for poorer families more than richer ones. This is because lower-income households dedicate a higher percentage of their income on necessities (pdf).

My data shows that this inflation gap tends to be widest in times of recession or in the early stages of economic recovery. In the aftermath of the Great Recession of 2008-2009, the gap in inflation rates between the lowest and highest income groups was close to 1 percentage point—higher than it is now.

By contrast, in times of economic growth—for example, from 2012 to 2018—the gap narrows. It even inverted at one point in 2016; the inflation rate for poorer Americans was almost a half-percentage point lower than that of richer Americans.

The main driver of the growing gap in 2021 was the increases in groceries and gas prices. This has made inflation run hotter for all households. But given the greater proportion of household income that poorer families dedicate to food and energy costs, it has affected them more.

Take out gas and grocery prices, then the inflation gap is reduced significantly.

Going forward, I expect the inflation gap will follow a similar pattern as we saw after the Great Recession—as economic recovery turns into continued expansion, inflation will be lower for low-income households than high-income households.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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