Inflation, the great hidden persuader of what we all can purchase, tends to be viewed through the income quintile prism. So are the wealthy becoming wealthier and the lower classes unable to catch up? We understand that this approach gives a very crude view of income categories. It overlooks the broader economic landscape and the systemic issues that truly shape our financial realities. As a journalist devoted to producing transparent and nonpartisan analysis, I think it’s important to unpack it further.
The appeal of income brackets is in their intuitiveness. Without them, we’d have no way to categorize and compare the financial well-being of various segments of the population. Meanwhile, headlines scream how inflation is decimating the savings of diverse lower-income families. The rich schmooze their way through it without a thought to truly breaking a sweat. This story, though it is true in part, ignores key nuances.
For instance, recent data reveals a counterintuitive trend: for households in every income quintile, the share of income needed to cover their 2019 consumption actually decreased over a four-year period. This is largely due to the fact that income growth was a greater factor than rising prices. Even more surprisingly, this share of households declined the most for the wealthiest households. Aren’t higher interest rates easing inflation, after all? Not even close. It doesn’t point to any clear failures, it just shows the result of trying to define success through income brackets alone.
The Congressional Budget Office (CBO) says that middle-income households are in a financial squeeze. Since 2019, the average price of all the goods and services they consume has exploded at an annual rate of 4.5% per year. That adds up to an annual loss of about $3,000 in purchasing power. Incomes have risen, but they’ve failed to catch up with the higher cost of living. Unfortunately, families across the country are starting to feel the squeeze.
Additionally, the effects of inflation are highly uneven, based on each person’s unique spending patterns and situation. A retired couple living on a fixed income will feel the effects of inflation in a very different way than a young family facing increasing costs. A homeowner with a long-term fixed-rate mortgage benefits from a hedge against future increased interest rates. A renter is always one lease renewal away from an escalation in rent. These personalized narratives are obscured when we lump data together into large, generalized income bands.
One key consideration that has been ignored almost entirely is the inequality minimizing inflation rate. Research indicates that this rate tends to be about 6% in the USA and 12% in OECD countries. A moderate amount of inflation tends to lower income inequality. Secondly, it is likely to promote economic development investment and increase direct economic activity favoring lower income populations. Going over this threshold disproportionately deepens the disparities that already exist.
As a former journalist, I came to understand that economic models are data-driven enterprises. When the data is flimsy, the models will be doomed to not deliver substantive insights. Especially when it comes to explaining inflation, looking only at income quintiles or quartiles paints a misleading picture. These include examining debt burden, wage stagnation and access to credit. High inflation disproportionately affects households with lower incomes. These families have to spend a greater proportion of their limited income on things like food and shelter. This happens while at the same time raising the cost of debt, especially for borrowers with variable-rate loans.
Wage stagnation is another important part of the equation. When wages are not indexed to inflation, workers don’t just suffer stagnant wage growth, they are experiencing a decrease in their purchasing power. Consequently, their quality of life suffers. This is particularly the case for people in lower wage occupations who have less bargaining leverage.
Access to credit is another crucial factor. Chronic and elevated inflation levels can rob consumers of their purchasing power. This limits their ability to leverage debt to afford large purchases, like homes or cars. This can do nothing but increase inequity between the haves and have-nots.
This is because asset price inflation, often driven by low interest rates and speculative investment, is a major producer of inequity. It’s true that homeowners get all the benefits of increased property values. Renters face skyrocketing monthly housing costs, putting down payment savings further out of reach. The dream of homeownership slips further out of reach for many low- and middle-income families.
At OverTraders.com, we know how important it is to get a complete picture of the financial world. We remain committed to helping Traders and Investors succeed. Our job is to equip them with the skills and expertise needed to succeed in today’s competitive markets. This requires a deeper understanding of the nuances of inflation and how it’s affected various segments of the population.
Our analysis goes further than just income bracket comparisons. We take a deep dive into real-time data, interpret market trends, and partner with like-minded organizations to provide educational resources that empower individuals to make informed financial decisions. We understand that financial well-being is a complex topic impacted by many different areas of life.
The latest studies demonstrate the correlation between financial health and consumer spending plans. As financial security increases, people start spending a larger share on services and saving. Creatively crafted policies to improve economic security have amazing potential to spark national economic opportunity. This, in turn, allows them to drive greater overall economic growth.
Four linear regression models indicate that financial well-being plays a key role in the likelihood to spend. This impact extends beyond just the categories’ impact on housing and personal care, too. Understanding these dynamics can allow policymakers to create better targeted, more efficient interventions that protect at-risk populations and safeguard our nation’s economic recovery.
Instead of relying solely on income brackets, we need to adopt a more nuanced approach that considers the broader economic context and systemic issues. This means tackling wage stagnation, encouraging affordable housing, increasing access to credit, and investing in education and job training.
We have to address these fundamental challenges. Together, we can build a more equitable, more inclusive, more sustainable economy that works for everybody, not just those at the top. While most advocates are calling for changes to income brackets, with their simple and convenient labels, that’s the easy fall back. It's time to move beyond simplistic comparisons and embrace a more comprehensive understanding of inflation's true impact.
