Inflation has had an impact on families all around the country. Housing expenses are rising, as are grocery bills and petrol prices, requiring individuals to adjust their routines, stretch their budgets, or go without. It’s been particularly difficult for parents.
Tamika Calhoun is a Jackson, Mississippi-based housing counselor. She is also a mother of five children, and she is joining us from Jackson right now.
SIMON: And please accept my apologies in advance for the fact that these are really personal queries about the family finances. What are the current grocery prices? – Is there anything you’ve gone without?
CALHOUN: On my most recent trip to the grocery store, I had to prioritize what we needed over what the kids wanted. When the kids come out of school, they’ll want snacks and other items.
CALHOUN: So we’re down to attempting to stretch the snacks or purchasing a large bag of chips rather than individual bags since they’re so expensive now. Because I have such a large family, I spend close to a hundred dollars on a single supper. And…
CALHOUN:…It didn’t seem like I was spending that much money on a single dinner before, but now – especially the meat bits – it does. We have a large family, therefore we have to get the larger meat packs.
CALHOUN: It certainly does. We don’t go anywhere any longer because petrol is scarce due to its current high price.
SIMON: Are you scared that if you don’t go to work because you’re sick or fatigued, your family will suffer even more?
CALHOUN: Definitely – either I work or we won’t have a place to live – because we don’t live someplace where we get a subsidy, like we did previously, when I knew that if I lost my job, we’d be safe in low-income housing. The rent would be reduced to a more affordable level. However, we no longer reside there. I feel like I’ve finally arrived to a point where we can move on and support ourselves without the help of the government. And now, with everything going on, I’m wondering if I chose the worst moment to do this. This was not something I expected to happen. And I realized I was mentally preparing for it. However, my savings have been reduced as a result of having to leave work due to COVID.
CALHOUN: No, since I earn far too much money, despite the fact that it is insufficient to cover all of my expenses. However, they’re…
CALHOUN:…The government’s criteria haven’t changed. Even though the price is lower, you still can’t make more than this…
SIMON: You barely make enough money to support yourself and your family. However, you earn too much money to be eligible for government aid.
CALHOUN: That’s right. We would most likely be struggling more more than we are now if it weren’t for the pandemic EBT. We’ve been stretching that a bit.
SIMON: This is a government program that provides food aid to families that would otherwise be delivered through schools.
CALHOUN: They gave, I believe, two deposits, and each youngster received their own card. So that’s what’s been really helping us out with our grocery shopping.
CALHOUN: I make an effort to be optimistic. But, if I’m being honest, I’m hoping I don’t get COVID again, or that none of my children have COVID again. It’s terrifying to think that I’ll have to send them to school and then they’ll get sick. Then there’s the fact that I don’t have child care, so I’d have to miss work to be with them. It’s possible that I’ll have to quarantine with them. And if that happens, I won’t be able to use any of my PTO time.
SIMON: Tamika, you have five children and would go to great lengths for them. However, in order to assist them, you must remain healthy and well-nourished. Do you ever get hungry?
CALHOUN: There have been instances when I’ve made sacrifices in order for them to eat. And I try not to tell them I did it…
CALHOUN:…because I know they’ll try to hand up their meals to me. But they’ve never gone hungry simply because I find a way to feed them.
SIMON: You’re right. You make self-sacrifices for your children. All I can say is that I wish you the best of luck in the world.
CALHOUN: I appreciate that. I’m optimistic because I believe things will improve. As an example, even though the world isn’t turning around, I’m working on attempting to – since, as I previously stated, wages remain constant while prices rise. If that means finding a higher-paying work or getting a degree in something that will allow me to acquire a higher-paying job, I’ll just do what I can and hope for the best.
How does inflation impact our daily lives?
Inflation lowers your purchasing power by raising prices. Pensions, savings, and Treasury notes all lose value as a result of inflation. Real estate and collectibles, for example, frequently stay up with inflation. Loans with variable interest rates rise when inflation rises.
What is the impact of inflation on household decisions?
- Inflation, or the gradual increase in the price of goods and services over time, has a variety of positive and negative consequences.
- Inflation reduces purchasing power, or the amount of something that can be bought with money.
- Because inflation reduces the purchasing power of currency, customers are encouraged to spend and store up on products that depreciate more slowly.
What is the impact of low-income families on inflation?
Everything has gone up in price.” While prices are rising worldwide, price increases are particularly damaging to lower-income families who already have tight finances. Almost all of their spending goes toward necessities like food, energy, and housing, all of which have witnessed significant rises over the previous year.
Why do the poor suffer from inflation?
The reason for the rising rich-poor inflation gap, often termed as inflation inequality by economists, is due to people’s typical spending habits in each income category.
During times of economic instability and crisis, most families choose to put off purchasing luxury items. People can’t, on the whole, cut back on necessities like groceries and heating, while wealthier customers are better positioned to store up when costs are low.
This shift in spending away from luxury things such as vacations and new automobiles and toward needs drives inflation higher for poorer households than for wealthier people. This is due to the fact that lower-income households spend a larger portion of their income on needs.
Is everyone affected by inflation?
Inflation is on the rise. It does not have the same effect on everyone. Rising costs, according to economists, can have a disproportionate impact on low-income households.
BYLINE: LAUREL WAMSLEY Over the last year, the consumer price index has climbed by more than 6%. Low-income families, for example, spend a larger percentage of their income on petrol than higher-income families. Even if this wasn’t the case…
JOSH BIVENS: It’ll still generate a lot more stress for lower-income families because they have a lot fewer adjustment margins to work with.
WAMSLEY: That’s Josh Bivens, the Economic Policy Institute’s director of research. He claims that growing prices in specific categories, such as food at home rather than restaurants, are more likely to effect low-income people.
BIVENS: Then there’s the main one: rent. Rent, after all, accounts for a much greater percentage of overall spending for low-income households than it does for everyone else. It is an absolute requirement.
WAMSLEY: According to the Federal Reserve Bank of New York, rents are predicted to jump 10% in the coming year. Republicans blame the Biden administration for rising prices, claiming that the president’s Build Back Better bill will compound the problem.
However, Arin Dube, an economics professor at the University of Massachusetts in Amherst, believes it’s critical to consider what’s happened to wages and inflation in the two years since the pandemic began.
WAMSLEY: During that time, he claims, inflation has increased by 7%, but earnings in the bottom fourth of the pay scale have increased by 10%. Because inflation was quite low during the onset of the pandemic, the time span had a considerable impact on the results. And, according to Dube, there has been particularly strong pay growth at the bottom in recent months, which is an unusual situation.
DUBE: Wage growth has been relatively slow at the bottom and middle for the previous 40 years, compared to significantly stronger growth at the top.
WAMSLEY: But, of course, these data are averages. And salaries aren’t rising for everyone.
Bryon Springer is a 38-year-old Army veteran. He works full-time in Stillwater, Oklahoma, for a tiny company that repairs computers and other electronic gadgets.
BRYON SPRINGER: My employer, on the other hand, does not believe in wage rises. I’ve been here for three years and still make the same $10 an hour that I did when I first started.
WAMSLEY: Springer is eligible for VA disability, which provides him with an additional $1,700 each month. He attempts to set aside a portion of his VA check for retirement and savings, but admits it’s difficult.
SPRINGER: My wage is shrinking every month as inflation eats away at it.
WAMSLEY: And housing expenses are a major concern for the younger generation.
Maria Gomez, a college student in Washington, D.C., is 19 years old. As a manager at a Mexican restaurant, she earns $17 an hour, which is roughly $2 more than D.C.’s minimum wage. Some of her pay goes toward her parents’ two-bedroom apartment, which she shares with them. She aspires to have her own apartment. However, given the city’s high housing expenses, it appears that she will be unable to do so by the time she graduates.
MARIA GOMEZ: I know that when I’m done with my education, I’m going to want to live on my own. However, I believe it will become quite difficult by the time I graduate. The cost of goods will undoubtedly rise. And that concerns me greatly.
DUBE: Increases in housing prices or rents are more likely to be baked in. And, unlike, say, petrol or food prices, they don’t reverse themselves quickly once they rise.
WAMSLEY: According to Dube, making broad forecasts about the future is difficult. However, if rents begin to rise rapidly and remain so, inflation could last longer and be more painful.
Are households always worse off when inflation is high?
Households are worse off if their nominal income, which they receive in current money, does not rise at the same rate as prices, because they can afford to buy fewer things. Inflation can also affect the purchasing power of fixed-interest rate receivers and payers over time.
What role does inflation expectation have in inflation?
The Federal Reserve’s mission is to achieve maximum long-term employment and price stability. It defines the latter as an average annual inflation rate of 2%. It attempts to help achieve that goal by “Inflation expectations are “anchored” at around 2%. If everyone expects the Fed to target 2% inflation, consumers and businesses are less likely to respond when inflation rises above or falls below that level (for example, due to an increase in oil prices) (say, because of a recession). It will be easier for the Fed to meet its targets if inflation expectations remain steady in the face of brief rises or drops in inflation. However, given the Fed has been falling short of its 2% goal for some time, some Fed members are concerned that inflation expectations are drifting away from the aim.
So, here’s how it works:
In a 2007 address, Fed Chair Ben Bernanke stressed the importance of anchoring inflation expectations: “The degree to which they are anchored might fluctuate depending on economic events and (most importantly) monetary policy action in the present and past. In this context, the term ‘anchored’ refers to a state of being generally insensitive to new information. Inflation expectations are well anchored if, for example, the public experiences a period of higher inflation than their long-run expectation but their long-run expectation of inflation does not alter much as a result. If, on the other hand, the public reacts to a brief period of higher-than-expected inflation by significantly raising their long-run expectation, expectations are ill-anchored.”
Academic economists, including Nobel laureates Edmund Phelps and Milton Friedman, began emphasizing inflation expectations as a significant component of the inflation-unemployment link in the late 1960s, and central bankers have followed suit. Inflation expectations grew unanchored as a result of continuously high inflation in the 1970s and 1980s, and rose in lockstep with actual inflationa phenomenon described as a wage-price spiral at the time. This cycle goes like this: rising inflation raises inflation expectations, prompting workers to demand wage increases to compensate for the anticipated loss of purchasing power. When workers win salary increases, corporations raise their prices to compensate for the higher wage expenses, sending inflation higher. Even if unemployment is high, the wage-price spiral makes it difficult to lower prices when inflation expectations rise.
Who is the hardest hit by inflation?
Inflation is defined as a steady increase in the price level. Inflation means that money loses its purchasing power and can buy fewer products than before.
- Inflation will assist people with huge debts, making it simpler to repay their debts as prices rise.
Losers from inflation
Savers. Historically, savers have lost money due to inflation. When prices rise, money loses its worth, and savings lose their true value. People who had saved their entire lives, for example, could have the value of their savings wiped out during periods of hyperinflation since their savings became effectively useless at higher prices.
Inflation and Savings
This graph depicts a US Dollar’s purchasing power. The worth of a dollar decreases during periods of increased inflation, such as 1945-46 and the mid-1970s. Between 1940 and 1982, the value of one dollar plummeted by 85 percent, from 700 to 100.
- If a saver can earn an interest rate higher than the rate of inflation, they will be protected from inflation. If, for example, inflation is 5% and banks offer a 7% interest rate, those who save in a bank will nevertheless see a real increase in the value of their funds.
If we have both high inflation and low interest rates, savers are far more likely to lose money. In the aftermath of the 2008 credit crisis, for example, inflation soared to 5% (owing to cost-push reasons), while interest rates were slashed to 0.5 percent. As a result, savers lost money at this time.
Workers with fixed-wage contracts are another group that could be harmed by inflation. Assume that workers’ wages are frozen and that inflation is 5%. It means their salaries will buy 5% less at the end of the year than they did at the beginning.
CPI inflation was higher than nominal wage increases from 2008 to 2014, resulting in a real wage drop.
Despite the fact that inflation was modest (by UK historical norms), many workers saw their real pay decline.
- Workers in non-unionized jobs may be particularly harmed by inflation since they have less negotiating leverage to seek higher nominal salaries to keep up with growing inflation.
- Those who are close to poverty will be harmed the most during this era of negative real wages. Higher-income people will be able to absorb a drop in real wages. Even a small increase in pricing might make purchasing products and services more challenging. Food banks were used more frequently in the UK from 2009 to 2017.
- Inflation in the UK was over 20% in the 1970s, yet salaries climbed to keep up with growing inflation, thus workers continued to see real wage increases. In fact, in the 1970s, growing salaries were a source of inflation.
Inflationary pressures may prompt the government or central bank to raise interest rates. A higher borrowing rate will result as a result of this. As a result, homeowners with variable mortgage rates may notice considerable increases in their monthly payments.
The UK underwent an economic boom in the late 1980s, with high growth but close to 10% inflation; as a result of the overheating economy, the government hiked interest rates. This resulted in a sharp increase in mortgage rates, which was generally unanticipated. Many homeowners were unable to afford increasing mortgage payments and hence defaulted on their obligations.
Indirectly, rising inflation in the 1980s increased mortgage payments, causing many people to lose their homes.
- Higher inflation, on the other hand, does not always imply higher interest rates. There was cost-push inflation following the 2008 recession, but the Bank of England did not raise interest rates (they felt inflation would be temporary). As a result, mortgage holders witnessed lower variable rates and lower mortgage payments as a percentage of income.
Inflation that is both high and fluctuating generates anxiety for consumers, banks, and businesses. There is a reluctance to invest, which could result in poorer economic growth and fewer job opportunities. As a result, increased inflation is linked to a decline in economic prospects over time.
If UK inflation is higher than that of our competitors, UK goods would become less competitive, and exporters will see a drop in demand and find it difficult to sell their products.
Winners from inflation
Inflationary pressures might make it easier to repay outstanding debt. Businesses will be able to raise consumer prices and utilize the additional cash to pay off debts.
- However, if a bank borrowed money from a bank at a variable mortgage rate. If inflation rises and the bank raises interest rates, the cost of debt repayments will climb.
Inflation can make it easier for the government to pay off its debt in real terms (public debt as a percent of GDP)
This is especially true if inflation exceeds expectations. Because markets predicted low inflation in the 1960s, the government was able to sell government bonds at cheap interest rates. Inflation was higher than projected in the 1970s and higher than the yield on a government bond. As a result, bondholders experienced a decrease in the real value of their bonds, while the government saw a reduction in the real value of its debt.
In the 1970s, unexpected inflation (due to an oil price shock) aided in the reduction of government debt burdens in a number of countries, including the United States.
The nominal value of government debt increased between 1945 and 1991, although inflation and economic growth caused the national debt to shrink as a percentage of GDP.
Those with savings may notice a quick drop in the real worth of their savings during a period of hyperinflation. Those who own actual assets, on the other hand, are usually safe. Land, factories, and machines, for example, will keep their value.
During instances of hyperinflation, demand for assets such as gold and silver often increases. Because gold cannot be printed, it cannot be subjected to the same inflationary forces as paper money.
However, it is important to remember that purchasing gold during a period of inflation does not ensure an increase in real value. This is due to the fact that the price of gold is susceptible to speculative pressures. The price of gold, for example, peaked in 1980 and then plummeted.
Holding gold, on the other hand, is a method to secure genuine wealth in a way that money cannot.
Bank profit margins tend to expand during periods of negative real interest rates. Lending rates are greater than saving rates, with base rates near zero and very low savings rates.
Anecdotal evidence
Germany’s inflation rate reached astronomical levels between 1922 and 1924, making it a good illustration of high inflation.
Middle-class workers who had put a lifetime’s earnings into their pension fund discovered that it was useless in 1924. One middle-class clerk cashed his retirement fund and used money to buy a cup of coffee after working for 40 years.
Fear, uncertainty, and bewilderment arose as a result of the hyperinflation. People reacted by attempting to purchase anything physical such as buttons or cloth that might carry more worth than money.
However, not everyone was affected in the same way. Farmers fared handsomely as food prices continued to increase. Due to inflation, which reduced the real worth of debt, businesses that had borrowed huge sums realized that their debts had practically vanished. These companies could take over companies that had gone out of business due to inflationary costs.
Inflation this high can cause enormous resentment since it appears to be an unfair means to allocate wealth from savers to borrowers.
Is inflation worse for the wealthy or for the poor?
According to my calculations, the lowest-income households are experiencing inflation at 7.2 percent, which is more than any other category. The rate of change was 6.6 percent for the highest-income families.
The gap between the two income categories grew significantly throughout 2021, starting at 0.16 percentage point and finishing at 0.6 percentage point, close to its greatest level since 2010.
During times of economic instability and crisis, most families choose to put off purchasing luxury items. However, most people are unable to cut back on essentials such as groceries and heating, despite the fact that wealthier customers are better positioned to stock up on these items while costs are low.
This shift in spending away from luxury things such as vacations and new automobiles and toward needs drives inflation higher for poorer households than for wealthier people. This is due to the fact that lower-income households spend a larger portion of their income on needs.
According to my research, the inflation gap is largest during recessions or in the early phases of economic recovery. The disparity in inflation rates between the lowest and highest income categories was close to one percentage point in the aftermath of the Great Recession of 2008-2009, which was bigger than it is now.
In times of economic development, however, the difference narrows for example, from 2012 to 2018. It even inverted at one point in 2016, with poorer Americans seeing nearly a half-percentage point lower inflation than wealthier Americans.
Increases in grocery and petrol prices were the primary cause of the widening difference in 2021. As a result, inflation has increased for all households. However, because poorer families spend a larger percentage of their income on food and energy, it has had a greater impact on them.
When petrol and grocery prices are removed from the equation, the inflation gap is dramatically narrowed.
Going forward, I expect the inflation gap to follow a similar trend as it did after the Great Recession: as the economy recovers and expands, low-income households will see lower inflation than high-income households.
What happens if inflation becomes too high?
If inflation continues to rise over an extended period of time, economists refer to this as hyperinflation. Expectations that prices will continue to rise fuel inflation, which lowers the real worth of each dollar in your wallet.
Spiraling prices can lead to a currency’s value collapsing in the most extreme instances imagine Zimbabwe in the late 2000s. People will want to spend any money they have as soon as possible, fearing that prices may rise, even if only temporarily.
Although the United States is far from this situation, central banks such as the Federal Reserve want to prevent it at all costs, so they normally intervene to attempt to curb inflation before it spirals out of control.
The issue is that the primary means of doing so is by rising interest rates, which slows the economy. If the Fed is compelled to raise interest rates too quickly, it might trigger a recession and increase unemployment, as happened in the United States in the early 1980s, when inflation was at its peak. Then-Fed head Paul Volcker was successful in bringing inflation down from a high of over 14% in 1980, but at the expense of double-digit unemployment rates.
Americans aren’t experiencing inflation anywhere near that level yet, but Jerome Powell, the Fed’s current chairman, is almost likely thinking about how to keep the country from getting there.
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Prices for used cars and trucks are up 31% year over year. David Zalubowski/AP Photo