The Inflation Gap

In an era of wild inequality, sputtering wages, and rising rents and health-care costs, the American working class has had one consistent financial respite: “stuff,” broadly defined, is cheap. Sure, workers might not be able to afford a decent apartment, a college education, or sufficient elder care for an infirm relative, or to ever, ever get sick. But burgers, leggings, yard tools, bicycles, dishes, smartphones, soda—these items have become less expensive, thanks to big-box stores and internet retailers and imports from abroad.

Or perhaps not. A new analysis from a prominent group of economic researchers suggests not only that rising prices have been quietly taxing low-income families more heavily than rich ones, but also that, after accounting for that trend, the American poverty rate is significantly higher than the official measures suggest. Call it “inflation inequality,” a subtle, pernicious way that the fortunes of the rich and the poor have diverged.

Using government data and scanner data from retail stores—the bar codes that get swiped at Target, the produce codes that get punched in at grocery stores—Xavier Jaravel of the London School of Economics found that from 2004 to 2015, the prices of the products purchased by the bottom income quintile increased faster than the prices of the products purchased by the top income quintile. As a result, low-income families experienced an annual rate of inflation conservatively estimated at 0.44 percentage points higher than that of high-income families.

The trend is small enough to go unnoticed year by year. For a given family, it might mean shelling out just pennies more on a grocery run or back-to-school shopping trip. But such changes compound over time, wedging apart the welfare of struggling households and flourishing ones. Rich families get competitive prices on organic groceries and athleisure and better-and-better electronics; poor families end up paying more for worse-quality alternatives.  

Jaravel suggested a mechanism behind the finding: Rising wealth and income inequality mean that richer people have ever more disposable income, creating a market incentive for retailers to cater to the needs of lawyers in Chicago and tech analysts in Boston over child-care workers in the Mississippi Delta and part-time retail workers in California’s Central Valley. More firms catering to well-off consumers means more competition for those consumers means more product innovation and product choice for those consumers, as well as suppressed prices. Fewer firms catering to low-income consumers means less competition for those consumers means less product innovation and product choice for those consumers, and increasing prices.

In an interview, Jaravel offered beer as an example. In the past 20 years, the tastes of higher-income consumers have fueled an explosion in craft brewing, whereas the market at the lower end has remained stagnant in comparison. A small-batch sour IPA is more expensive than a Keystone Light, but fancy beers are cheaper, more plentiful, and more accessible than they were in the early Aughts, whereas beers that come in a 30-pack taste the same and cost as much as they always did. “Of course, luxury products are more expensive,” Jaravel told me. “But inflation is about a different thing. It’s not about the level. It’s about the change.”

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Inflation inequality has not filtered into government calculations, at least not yet. “These patterns are all very, very strong,” Jaravel told me. “But you can’t measure them with the standard data that the Bureau of Labor Statistics has, because the Bureau of Labor Statistics doesn’t keep track of spending patterns within these very detailed product categories.”

But new research from Jaravel, along with Christopher Wimer and Sophie Collyer of the Center on Poverty and Social Policy at Columbia University, suggests that it should. Accounting for differential changes in prices would bump up the 2018 poverty rate by 8 percent—adding 3.2 million people to the ranks of the officially poor, and 836,000 people to the ranks of those in deep poverty. According to standard government measures, the real household income of the bottom quintile fell 1 percent from 2004 to 2018; using the new, inflation-sensitive accounting, it fell more than 7 percent.

Inequality, in other words, is depriving low-income families of wages, shutting them out from the benefits of economic growth, and making day-to-day life more expensive. “It’s not just that inflation is not uniform across income groups,” says Michael Linden of the Groundwork Collaborative, a think tank and advocacy organization that worked with Wimer, Collyer, and Jaravel to produce the new poverty-and-inflation analysis. “It’s that it’s not uniform across income groups because of inequality itself.”

The new data undercut the popular conservative narrative that falling prices and rising wages have functionally eradicated poverty in the United States. They imply that the United States might be systematically underestimating the amount of poverty and the scope of inequality within its borders. They also act as a sharp rebuke to the Trump administration’s efforts to use a different, lower inflation measure to calculate poverty statistics and thus to shrink eligibility for a wide range of government benefits.

“These choices seem like they’re—I don’t know if arcane is the right word, but they seem technical, boring,” Wimer says. “They have implications for the structure of the safety net and anti-poverty policies. Who’s counted as poor matters a lot for federal dollars that go to states, for who’s eligible to receive food assistance and medical care. Even something that sounds dry, like inflation, has major implications for people’s lived realities.”

The new analysis also implies that low-income families are getting squeezed not just by the rising costs of rent and health care—but by the costs of just about everything. As always, in the United States, it’s expensive to be poor and it’s good to be rich.