Price increases could be a sign of a fast-growing economy. Demand for products and services is fueled by people buying more than they need to avoid tomorrow’s rising prices. Suppliers are unable to keep up. Worse still, neither can wages. As a result, most people are unable to afford common products and services.
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.
What is inflation, and how does it effect individuals and society?
Inflation is the rate at which the price of goods and services in a given economy rises. Inflation can have a detrimental influence on society if it leads to higher prices for fundamental necessities such as food.
How does inflation effect the average person?
Answer: Prices of everyday things such as food, fuel, electricity, clothing, and house maintenance services rise slowly, but the average person’s income remains constant or at most meets the inflation rate.
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.
Who is the most affected by inflation?
Inflation, which is always a key economic indicator, is especially important to monitor right now because it threatens to undermine, if not completely erode, the Biden administration’s massive spending on behalf of poor and working-class Americansits “economic justice” agenda (“Inflation Jumps to 13-Year High,” Page One, June 11). For poorer people, the effects of inflation are not just larger, but disproportionately greater. Price rises (for products and services) are often countered by greater income for those with higher earnings. Furthermore, prices for essential necessities sometimes rise faster than prices for luxury things, a phenomena economists refer to as “price inflation.” “Inflation disparity.” Simply put, low-income families’ budgets will be strained as they face higher costs for the necessities they require (food, energy, transport, child care).
Too often, the economic well-being of the most economically vulnerable Americans is described in terms of the most recent Washington program or policy. Those who act in the name of the “If we want to properly comprehend what’s happening not just to the economy in general but specifically to the most vulnerable within it, we need to pay more attention to basic economic indicators like employment rates by demographic group, incomes, and, yes, inflation.
What effect does inflation have?
The entire economy is impacted when energy, food, commodities, and other goods and services costs rise. Inflation affects the cost of living, the cost of doing business, the cost of borrowing money, mortgages, corporate and government bond yields, and virtually every other aspect of the economy.
What happens if inflation rises too quickly?
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.
The Conversation has given permission to reprint this article under a Creative Commons license. Read the full article here.
Photo credit for the banner image:
Prices for used cars and trucks are up 31% year over year. David Zalubowski/AP Photo
What are the benefits and drawbacks of inflation?
Do you need help comprehending inflation and its good and negative repercussions if you’re studying HSC Economics? Continue reading to learn more!
Inflation is described as a long-term increase in the general level of prices in the economy. It has a disproportionately unfavorable impact on economic decision-making and lowers purchasing power. It does, however, have one positive effect: it prevents deflation.
What issues do ordinary people suffer as a result of inflation?
Inflation can produce three types of problems: unanticipated redistributions of purchasing power, muddled pricing signals, and difficulty in long-term planning if other economic variables do not move in lockstep with inflation, or if they adjust for inflation only after a time lag.