Head of Global Economics
BofA Global Research
Inflation: who’s paying the price?
The recent rise in inflation is disproportionately affecting households with lower income and wealth. These households have less savings to buffer the inflation shock. Moreover, their consumption patterns are skewed toward the goods that have seen the most inflation in recent months. For both of these reasons, the inflation surge has caused a greater hit to lower-income spending power. We find that surging inflation in just a few goods categories is cutting the spending power of less-educated households by 4.6% on an annualized basis, compared to 3.0% for more-educated households.1
Specifically energy, food, household furnishings & supplies and new & used cars have seen CPI inflation of 12.8% over the last year, compared to just 0.7% (annualized) in the five years leading up to the pandemic.2 These four categories make up 35% of the consumption basket for households in which no one is a college graduate.2 The corresponding figure for households with at least one college graduate is 28%.2
When we compare urban and rural households, we find that energy and new & used cars make up a much larger share of the consumption basket for rural households. They also earn and save less than urban households, so inflation is a bigger drag on their income. Inflation is less painful when the head of the household is either self-employed or a manager/professional. Again, these households earn and save more, and allocate less of their total consumption to the high-inflation categories.
The difference in the impact of inflation on spending power is the most stark when we divide the population by education. However, our broad conclusion is that the ongoing bout of inflation has been particularly painful for lower-income households. These households have the highest marginal propensity to spend and less savings to buffer the inflation shock. Therefore inflation is likely to weigh significantly on consumption. We have cut our real consumer spending growth forecast for next year: we now expect it to average 2.5%, rather than 3.5%, over the four quarters of 2022.
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- BofA Global Research, BLS