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Poverty up? Blame oil prices.

at 10:58 AM ET, 09/27/2011

Were high oil prices partly responsible for the uptick in poverty this year? Yes, say Trevor Houser and Shashank Mohan of the Peterson Institute for International Economics. They pored through the 2011 Census data and found that “over one-third of the increase in the U.S. poverty rate in 2010 resulted from the rapid rebound in oil prices.” (Obviously most of the increase came because incomes are declining.) What’s more, “if oil prices had remained constant at 2001 levels over the past decade, there would be 2.6 million fewer Americans in poverty today.”

But why should oil prices matter here? After all, the Census Bureau adjusts its poverty index each year using the average price index for consumers. So if oil prices push up inflation, the poverty line should rise too, right? The problem, note Houser and Mohan, is that poor people spend a much bigger share of their income on both gasoline and a variety of products and services that use oil, as seen in the chart below, which shows oil expenditures as a share of after-tax income by quintile:

Oil expenditures as a share of after-tax income by income quintile 2007-2009
That means the poor get hit disproportionately hard when oil prices go up — and slip below a poverty line that rises more slowly. The researchers conclude: “In the absence of an upside surprise in income growth or a sudden collapse in oil prices in the months ahead, expect another round of depressing poverty numbers this time next year.”

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