Opinion Why the poor suffer most from inflation, even though their wages have risen a lot

A customer shops at at a grocery store on Feb. 10 in Miami.
A customer shops at at a grocery store on Feb. 10 in Miami. (Joe Raedle/Getty Images)

Who’s suffering most from inflation right now? What about when you take into account how much faster wages have risen at the bottom of the income distribution than at the top?

There’s been a lot of debate about these questions. The White House and some economists have suggested that lower-income workers have been largely shielded from the pain of price increases because their raises have outpaced inflation. In real terms, living standards for lower-income, working families look like they should be rising.

But that’s at odds with how families describe their finances. In survey after survey, lower-income families are much more likely than higher-income ones to say they’re enduring hardship due to price hikes.

I wanted to assess these competing narratives and figure out how much the complaints about inflation might be driven by perception (and negative media coverage) vs. measurable declines in living standards. The result? It’s complicated, but the upshot is the working poor aren’t imagining things. In the current race between wage gains and higher expenses, the typical working-class family is losing out.

Meanwhile, the typical higher-income household is coming out ahead. Way ahead.

Here’s the money chart (so to speak), with calculations by Penn Wharton Budget Model. It shows inflation-driven increases in spending vs. increases in annual earnings for households at different income levels:

By the end of 2021, the poorest working families had experienced growth in their expenses far exceeding their wage gains; the reverse was true for the highest-income households. Let’s walk through why that’s happening.

Follow Catherine Rampell's opinionsFollow

In terms of hourly wages, the lowest-paid workers — including those in food services and other sectors with severe labor shortages — have indeed received the biggest raises in percentage terms. This chart shows hourly wage changes for different quartiles of workers, using six-month moving averages. By December, the lowest-earning quintile had gotten raises of around 6.4 percent; that’s slightly higher than the comparable measure for overall inflation at the time (about 6 percent).

But you have to look at some other factors to determine whether expenses are outpacing earnings — including different households’ work patterns and spending habits.

First, even if lower-income households get a big hourly raise in percentage terms, a big percent of a small number still leaves a pretty small number. So a worker making $10 per hour who got a generous-sounding 20 percent bump in pay is making only $2 per hour more.

That helps, but it doesn’t add up to very much by the end of the year. Especially when you consider how many hours these households typically work.

In 2021, people in lower-income households were more likely to work part time and to cycle in and out of employment than those in higher-income households. High-wage workers may have received slightly smaller raises in percentage terms, but a small percent of a bigger hourly base, plus many more hours logged by working continuously and full time, can add up to a lot.

That’s what’s going on with earnings. Now consider what’s happening with spending.

Standard measures of “inflation” are supposed to reflect the average spending patterns across households. Averages can obscure a lot though. Every family buys a slightly different bundle of products; if your family drinks a ton of milk and milk prices spike, your cost of living might rise faster than that of the “average” household.

The poor have systemically different spending habits than do the rich. Low-income households tend to devote a higher share of their spending on gas and groceries, for example, than do higher-income households. Those are two categories with big price spikes.

Alexander Arnon, Zheli He and Xiaoyue Sun of Penn Wharton Budget Model calculated some alternative consumer price indexes based on the spending habits typical for households at different income levels. In recent months, they found, lower-income, working households saw slightly bigger increases in prices for the things they buy than did middle- or high-income households.

Another factor affecting whether these price increases are outpacing wage gains: what fraction of a household’s earnings typically gets spent at all.

People with very low incomes tend to spend every penny of their wages. Hence that expression “living paycheck to paycheck.” Actually, most low-income households spend much more than their paycheck.

For example, the median working household with under $20,000 in income spent roughly 3.5 times what it earned in wages in 2020. That ratio was only slightly lower in 2019, before the pandemic (about 3.2).

How can this be? Earnings aren’t the only source of money flowing into many households; wages are supplemented by various kinds of government transfers (such as the earned-income tax credit, food stamps, Social Security). Those government benefits help support spending. Debt also helps bridge the gap between what some households earn in wages and how much they spend.

Higher-income people, by contrast, tend to spend a relatively small fraction of their earnings each year. The median household making over $150,000 spends less than half its earnings in a given year.

The ratio of spending to earnings matters a lot when you’re assessing how much of a household’s wage growth got eaten up by inflation.

Imagine you’re a low-income household. You had $10,000 in wage earnings but $20,000 in expenses. If you got a 7 percent raise, and faced inflation of 5 percent, it looks like your wage gains are outrunning inflation. In actual dollars, though, you got a raise of $700 — less than your additional costs of $1,000.

So you actually came out behind.

This dynamic operates in reverse for higher-income households. That’s how you end up with the first chart, with spending increases greater than earnings gains among the poorest working households, and the opposite at the top.

Now there are at least two major factors we haven’t considered: government stimulus and wealth.

The government sent families more cash than usual last year, including through stimulus checks and advanced payments of a larger child tax credit. For many low-income families, these payments should have more than offset the additional amounts they shelled out on increasingly pricey groceries, gas and other expenses.

Why don’t low-income families seem to factor this in when asked to assess how much price increases are hurting them?

I’m not sure. Maybe it’s because these were temporary, one-off payments. The benefits may have been useful in making the rent or paying down debt or even shoring up savings a year ago, but they might provide little comfort as grocery bills continue to rise month after month. Alternatively, maybe the end of this fiscal support was quite salient, and has made people feel poorer.

There’s another reason why higher-income households may feel less pained by inflation: Their wealth grew — a lot. Home values have skyrocketed. Stock markets have dipped recently but are still way up on net since the pandemic began. Richer people disproportionately benefit from these things. Sure, they’re still frustrated by higher gas and grocery prices, but proportionally, a few extra bucks on food and fuel might feel easier to absorb if your salary, home value and 401(k) have all grown.

Early in the pandemic, many commentators lamented the two-track, or K-shaped, recession: one where the rich were doing fine while the poor foundered. This past year, as labor shortages helped low-wage workers negotiate for larger raises, it looked like those at the bottom were finally seeing their relative fortunes rise.

But inflation has robbed many of the poorest households of even these victories. So the same old trends continue: The rich get richer, while the poor struggle to get by.