Inflation Hits the Poor Hardest

By Neil Irwin and Alejandro Lazo
Washington Post Staff Writers
Friday, March 21, 2008

Inflation is walloping Americans with low and moderate incomes as the prices of staples have soared far faster than those of luxuries.

The goods and services Americans consumed in February were 4 percent more expensive than they were a year earlier. But there is a big divide in how much prices are climbing between the basic items people need to live and get to work, and those on which they can easily cut back when times are tight.

An analysis of government data by The Washington Post found that prices have risen 9.2 percent since 2006 for the groceries, gasoline, health care and other basics that a middle-income American family has little choice but to consume. That would cost such a family, which made $45,000 on average in 2006, an extra $972 per year, assuming it did not buy less of such items because of higher prices. For a broad range of goods on which it is easier to scrimp -- such as restaurant meals, alcoholic beverages, new cars, furniture, and clothing -- prices have risen 2.4 percent.

Wages for typical workers, meanwhile, have been rising slowly. In that same time span, average earnings for a non-managerial worker rose about 5 percent. This contradiction -- high inflation for staples, low inflation for luxuries and in wages -- helps explain why American workers felt squeezed even before the recent economic distress began.

"It just doesn't seem like anything is cheap these days," said Faith Tyler, 41, a personal trainer from Baltimore who has reacted to the higher prices for necessities by cutting back on luxuries. "I don't eat out very much, no vacations, nothing extravagant unless it's on sale."

Inflation is not occurring because labor markets are tight or because the U.S. economy has been overstimulated; if that were the case, wages would be driving inflation up, leaving ordinary households in decent shape and doing more damage to those who lent money at fixed interest rates.

Instead, this inflation is driven by global commodity markets. China, India and other developing countries' thirst for oil has been growing faster than producers can quench it, sending the price of oil up about 60 percent since 2006. Prices for oil and other commodities fell yesterday though they remain very expensive by any historical standard.

Expensive crude oil has translated into higher costs to heat a house or drive to work. The average middle-income household must spend $378 more per year on gasoline than it did in 2006 if it consumes the same amount, and an extra $38 on fuel oil.

The rapid growth of developing nations, combined with the increasing use of land to produce ethanol, has led demand for food to outstrip supply. That middle-income family is spending $253 more each year on groceries than it did two years ago, assuming it did not change its buying patterns.

The price for dairy products has risen 15 percent since 2006; fruits and vegetables are up 10 percent. Even routine cereals and bakery products are up 8 percent. Tyler, the personal trainer, complained that soy milk is more expensive: "Why is it going up from $3.49 to $4.10 for a gallon? It comes from a bean, not a cow."

A deeply rooted set of problems in the system has caused health-care costs to rise faster than those of most goods, costing that middle-income family $204 more compared with 2006.

"This is what's at the core of the middle-class squeeze," said Jared Bernstein, an economist at the Economic Policy Institute, a left-leaning think tank. "The idea that you can understand the kind of budget constraints that middle-class families face by looking at overall inflation is wrong. You have to look at the core items a middle-class family buys."

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