Does inflation hit the poor more than the rich?

Por Tyler Cowen

As inflation rises at its fastest pace in four decades, economists debate which group suffers the most: the poor or the rich?

This type of question is not an easy one to answer, especially when inflation rates have been so low of late and hard data so scarce. It is also not obvious how exactly to compare the losses of the poor with the losses of the richest. However, the arguments suggest that it is the poor, as almost always, who receive the worst blow.

One big factor: the poor are the socioeconomic group that have the hardest time buying a home, and real estate appears to be one of the best hedge against inflation. In recent times, real estate prices in the United States have skyrocketed, even during the recent inflationary period.

For their part, rents have been increasing at a rapid pace, due to the combination of growing demand and limited supply. The biggest losers will be the poor. And if the poorest people are trying to live in a relatively prosperous place, perhaps to enjoy future economic mobility for themselves and their children, the increased income will consume a significant portion of their income.

Another asset class that has risen in value recently is crypto. Even though there is no good data on who is buying crypto, the poor are likely to be underrepresented here too, if only because they have less disposable income.

The rise in cryptocurrency prices is mainly due to factors incidental to current retail price inflation, but a more general point applies: the poor have a disproportionate share of their assets in pure cash, which has no potential for investment. price appreciation and is strongly affected by inflation.

On the other hand, the poor also save less because they spend a relatively large percentage of their income on basic necessities. That means they have smaller buffers against many kinds of changes and uncertainties, including inflation.

Some researchers have referred to inflation as a “regressive consumption tax”Because cash balances are often the path to consumption for lower income groups. The poorest people are also less likely to have cash management accounts and other asset holdings that could partially insulate them from inflation losses.

There are some compensating factors that indicate that the poor may have protection against the current price spike. For example, hotel rooms, new and used cars, rental cars, and gasoline have seen especially high increases, while the poor are less likely to spend on those items.

However, even there, there is ambiguity. The poor buy fewer cars than the rich, but they also buy lower-quality cars and find it more difficult to put off buying a car for a few years when they don’t want to pay a higher price. This is yet another example of the fact that the poor may find it more difficult to adjust in an inflationary environment.

Probably the strongest argument for the notion that the poor are less affected by inflation is that inflation can, in some circumstances, reduce the real value of debt. If prices go up 7% and your income goes up 7%, suddenly your debts, which are normally fixed at face value, are worth 7% less.

This mechanism is powerful, but it assumes that real wages keep pace with inflation. Right now, real wages are falling, and with higher inflation, they may continue on that path. Also, many poor people refinance their debts for longer periods of time. Paying off those debts will eventually be cheaper in inflation-adjusted terms, but not in the short term.

My arguments are focused on the United States, but in other parts of the world the general correlation is that high inflation and high income inequality go hand in hand. Correlation is not causation, but those numbers are not helpful to anyone who wants to argue that inflation is a path to greater income equality.

Have stratospheric levels of inflation done much for the poor in Venezuela and Zimbabwe? On the other hand, if the question is which group would benefit from an improvement in living standards driven by higher investment rates, as could result in a period of stability, it is the poor, not the rich.

The effects of inflation are numerous and complex. It cannot be said definitively that inflation hurts some income groups more than others. However, it is clear that inflation is not a trivial matter for the poor.