• You’ve probably heard a lot about inflation recently — costs are rising at the fastest pace in decades.

• Inflation is the increase in the cost of living. It’s calculated by adding up all the price changes for things people spend money on. Economists call this a basket of goods.

• Nationally, the inflation rate in May was 8.6%, which means the cost of living has risen by about 8.6% in one year for the average basket of goods. That’s the fastest increase since 1981. But this overall number can be misleading.

• An 8.6% inflation rate doesn’t mean everything you buy is exactly 8.6% more expensive — prices rise at different rates. For example, from May 2021 to May 2022, the cost of housing increased 5.5% while the price of gasoline skyrocketed 48.7%.

• Most other goods and services, such as food and utilities, experienced price changes somewhere between these two extremes.

UTILITIES

+16.2%

HOUSING

+5.5%

FOOD

+10.1%

TRANSPORT

GAS

+48.7%

HEALTHCARE

INFLATION

+8.6%

By obscuring how individual prices change, the top-line numbers also hide how inflation affects people differently.

Millions of families buy different goods and services, earn different paychecks, and live in different places. So each household faces a unique inflation rate based on what's in their personal basket.

That means inflation isn't felt equally. Like many other burdens in American society, inflation is often felt the most by the people with the least.

Economists have a name for this phenomenon: inflation inequality.

A primary driver of inflation inequality is that poor and low-income families spend a much greater portion of their income on necessities – food, housing, gasoline. When those prices rise, poor families immediately feel the squeeze.

Consider households in the Northeastern U.S. that make between $15,000 to $30,000 a year and those making between $100,000 to $150,000 a year. Based on the latest federal data on household spending:

• The average high-income household spends approximately $10,900 a year on food, while the low-income household spends about $4,650.

• Food costs are rising by about 9%, so after one year the high-income household would have to spend an additional $981 to buy the same food.

• The average low-income household would have to spend an additional $420.

• Now let’s add the cost of housing: The higher-income household spends $27,441 on food and housing, while the low-income household spends $14,198.

• To keep up with inflation, the high-income household’s food and housing costs go up by $1,510 in one year, and the low-income household’s bill increases by $771.

• Finally, let’s add everything the federal government looks at to the basket of the high-income household. Inflation adds approximately $7,273 in annual expenditures.

• Adding everything into the low-income household’s basket, we see that their inflation costs are significantly lower — about $2,882.

• But when we consider what people earn, high-income households clearly have enough income to much more easily cover their rising inflation costs.

• In contrast, low-income households already make less income than they actually spend, and inflation is making things worse.

HIGH-INCOME HOUSEHOLD

EXPENSES

0

INFLATION

0

INCOME

$121,558

LOW-INCOME HOUSEHOLD

EXPENSES

0

INFLATION

0

INCOME

$22,498

“So often we can predict who are going to be the winners and losers out of economic change,” said Tara Sinclair, an economics professor at George Washington University. “And consistently the high end just keeps getting more benefits, and lower-wage workers get hit once again.”

In addition to spending more on necessities, poor Americans suffer more from inflation because they can’t easily adapt to rising prices.

When prices increase, people swap higher-price, higher-quality goods for lower-price, lower-quality goods. But it’s hard for low-income households to spend less on bread, rent, or gas, because there aren’t cheaper options to choose from.

“They're going to be forced to make really difficult decisions and choices about how to spend their limited budget, and what necessities that they're going to go without,” said Linsey Edwards, a sociologist at New York University.

Low-income households also use “stretching” to get by, Edwards said: making goods last longer by using less of them, such as by watering down laundry detergent or milk.

But substitution and stretching can only go so far. To get a better understanding of why inflation can be so pernicious, especially for low-income households, let’s dive back into the basket of goods.

INCOME TAKEN UP BY INFLATION

3.4

UTILITIES

Utilities inflation takes up 3.4% of the low-income households' incomes and 1.1% of the high-income households' incomes.

Utilities keep the lights on and help us survive the seasons. Families can “stretch” on utilities by reducing electricity consumption and keeping the thermostat down, but they’re a necessity by definition.

From May 2021 to May 2022, utility prices increased 26.3% in the Northeastern United States Electricity prices have increased 15.3% in the past year, and natural gas prices have soared 31.1%.

Philadelphia-area utility provider PECO hasn't seen an increase in late payments due to inflation, a spokesperson said. But from December 2020 to December 2021 there was a 40% increase in the amount of financial assistance that PECO provided to customers.

INCOME TAKEN UP BY INFLATION

3

TRANSPORTATION

Transportation inflation takes up 3% of the low-income households' incomes and 1.9% of the high-income households' incomes.

Transportation inflation forces families to make difficult choices.

Driving saves time, and time is a valuable resource that can be used to take care of kids, work longer hours, or rest and relax. Time-saving transportation is one of the first things to go when poor families face budget pressures, Edwards said. When families can’t cut down on driving time, they may rely on friends and family for rides.

But for many poor workers, driving to work is a necessity. And that makes gas a necessity, said Zheli He, an economist at the University of Pennsylvania. The rise of remote work has put further pressure on low-wage workers to commute by car, since many service jobs, such as restaurant and delivery jobs, have moved away from city centers and into suburbs, where people are working from home. Higher gas prices immediately take a bite out of these workers’ paychecks.

New and used cars have also seen extraordinarily steep inflation over the past year. With the cost of used cars rising almost three times as fast as new cars, those who can afford new cars experience lower vehicle inflation.

In the long run, families could buy new electric and fuel-efficient vehicles to dodge higher gas prices. But Sinclair said this offers little solace for poor families right now: “[It’s] really hard to say to someone who is struggling to make ends meet, ‘Why don’t you go buy an electric car?’”

INCOME TAKEN UP BY INFLATION

1.9

FOOD

Food inflation takes up 1.9% of the low-income households' incomes and 0.8% of the high-income households' incomes.

There is nothing more necessary than putting food on the table. But not all food is equal.

Food expenditures can be divided into two main categories. The first is food at home — the groceries you use to prepare meals. Food at home is generally cheaper and considered more essential than the second category, food away from home, or going out to eat.

While households in the Northeastern United States that make between $100,000 to $150,000 annually spend about 8% of their income on food, low-income households that make between $15,000 to $30,000 spend more than 20% on food. Because food is a much greater share of poor households’ budgets, food inflation hits them hard.

Low-income households also spend more of their food budget at home than wealthier households do. So while wealthier households can eat out less when food prices go up, poor households already primarily spend on food at home. And the cost of groceries is rising faster than the cost of eating out.

At the grocery store, low-income consumers have a much more difficult time responding to rising food costs, said Munseob Lee, a University of California, San Diego economist. His research has identified three ways people adjust to food inflation — and all three are much more difficult if you’re poor.

The first is trading down to lower-quality foods. For example, instead of buying an expensive steak, a consumer could buy an inexpensive chicken breast. But people already buying the cheapest food available have little room to maneuver.

The second method is to shop at a cheaper store. But poor Americans are often already shopping at the cheapest nearby supermarkets. And transportation can limit their options.

The third is using coupons. In Lee's research on the inflationary period following the Great Recession, he found wealthier families are much more likely than poor families to take advantage of coupons in the checkout lane. Poor families may lack the time to gather and effectively use coupons, he said.

INCOME TAKEN UP BY INFLATION

1.6

HOUSING

Housing inflation takes up 1.6% of the low-income households' incomes and 0.4% of the high-income households' incomes.

Housing is the largest expense across all income groups.

And as with other necessities, housing makes up an even larger portion of income for poor households. This is because poor families typically don’t own their own homes, and must spend a big chunk of their budget on rent.

Housing is one category where inflation inequality and racial inequality are clearly connected. Black families in the U.S. are much less likely to own their home, even after accounting for differences in income, Lee said, thanks partly to systemic racism such as discriminatory lending practices.

Because Black Americans are much more likely to rent, they’re also much more vulnerable to housing inflation. While housing inflation numbers are currently lower than other categories, Sinclair believes the true rate could be higher based on Zillow estimates and the lag in reporting for rent inflation.

Meanwhile, families that own a home with a mortgage may actually benefit from inflation: As other prices rise, monthly mortgage payments stay the same.

“The monthly payment that you will be making 10 years from now is going to be worth much less in real terms than it is today,” said Ryo Tashiro, an economist at the Philadelphia Federal Reserve Bank.

INCOME TAKEN UP BY INFLATION

0.6

HEALTH CARE

Healthcare inflation takes up 0.6% of the low-income households' incomes and 0.2% of the high-income households' incomes.

Health care has seen much smaller price increases than other categories. In the Northeastern United States, the inflation rate for medical care is 3.4%. But this uptick, combined with the larger increases in other areas, could cause problems for the group most likely to consume healthcare services: the elderly.

Retirees and the elderly are much more likely to live on fixed incomes, meaning their incomes stay the same regardless of inflation. Although Social Security payments are adjusted for inflation, other sources of income, such as many annuities and pensions, are fixed. So many older Americans see their purchasing power eroded by inflation.

When times get tight, doctors visits can be one of the first things to go, Edwards said, meaning poor Americans may forgo important health care so they can pay for other necessities.

INCOME TAKEN UP BY INFLATION

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THE FUTURE OF INFLATION

TKTK inflation takes up ???% of the low-income households' incomes and ?% of the high-income households' incomes.

As officials work to curb inflation, experts said there are trade-offs for poor and low-income households.

If inflation remains high or wages can’t keep up with rising prices, then people’s purchasing power will be substantially eroded.

But efforts to lower inflation, such as the Federal Reserve’s moves to raise interest rates at the fastest pace since May 2000, also have downsides.

Raising rates too quickly could push the economy into a recession, and economic downturns are consistently devastating for the poorest Americans. Even if the economy doesn’t go into a recession, higher interest rates could still lead to higher unemployment — and those workers most at risk tend to be those with the least education and the lowest wages.

Either way, poor people get squeezed the most.