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Economists warn of inflation inequality in 2022

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Rosemead shoppers shop at Walmart on November 22nd, 2021.

Frederic J. Getty Images| AFP | Getty Images

Economists warn that the coronavirus pandemic led to an era of inflation inequality. This is where poor families bear the brunt, according to economists.  

Because they allocate a larger portion of their budget to categories that are more expensive. For example, food prices have risen 6.4% in the last year while gasoline has risen a staggering 58%. As federal stimulus programs end, many are seeing higher prices.  

“They’re essentially looking to stretch a dollar most days,” said Chris Wimer, co-director of the Center on Poverty & Social Policy at Columbia University. This will lead to hard choices about whether you want to pay gas for your car or the child care of your children, or how to feed the family. 

The Penn Wharton Budget Model recently found that the average household spending in 2021 on the same product they purchased in 2020 and 2019 was about 7% higher. This amounts to about $3,500 per household. 

Contrary to this, only 6% of the wealthy household’s spending went up. 

For the wealthy, a shift in spending

According to Kent Smetters (director of Penn Wharton’s model), this disparity is common during periods of inflation. But since the 1980s — the last time prices rose this quickly — higher-income households have shifted more of their spending away from goods and toward services. As an example, 2020 saw food consume 12.7% of household budgets, as compared to 16% in the lowest 20%.

However, the prices of essential commodities have gone up due to pandemic production disruptions.  

Smetters explained that the supply crunch has made it harder for them to buy what they want. It’s more broad-based than it was in the past. 

These findings are in line with an analysis by Alberto Cavallo, a Harvard Business School economist of debit and credit card data at the beginning of the pandemic. He found that prices rose for low-income people at twice the rate of those who are wealther.

Researchers from Columbia and London School of Economics jointly estimated in 2019 that approximately 3 million additional people could be classified as being living in poverty, if their incomes were corrected for inflation. 

Experts are now concerned that the looming pandemic and Congress’ failure to pass President Joe Biden’s comprehensive social spending plan will lead to poverty rising in 2022. Particularly concerning is the ending of the monthly child tax credit payments. This provided $300 for families for every child under 6 years old and $250 to older children.  

Be worried about the end of tax credits

Columbia estimates that nearly 4,000,000 children were able to receive the benefit without falling into poverty. December 15 was the last month of checks. 

Wimer explained that you can clearly see the impact of such payments. “We are obviously all concerned about January,” Wimer said. 

Republicans worry about the contrary: More money coming from Washington will cause higher inflation and a greater burden for the poor.  

Senator Lindsey Graham (Republican from South Carolina) stated earlier in the month that there are provisions in this bill which could lead to a bipartisan agreement once inflation has calmed down. “But, right now, it is not the best time to spend more on federal government. It will grow the government and cause inflation problems. 

Senator Joe Manchin of West Virginia, who is concerned about the costs associated with the child tax credit, has apparently been influenced by this argument. He has demanded tighter restrictions on benefits and work requirements in order to include other social programs into the package. Democrats can’t pass the bill without him voting in the equally divided Senate. 

“There’s a case to be made that tax credits are very necessary — that if we weren’t dealing with inflation, these are certainly a way to support the disadvantaged,” said Gustavo Flores-Macias, associate professor at Cornell University. But inflation is making it difficult to time the election.  

Low-wage workers have one advantage: they received the largest pay increases during the pandemic. This helps to offset the price rise. According to the Federal Reserve Bank of Atlanta, the median wage increase for the lowest quartile over the last year was more than 5%. As of November, the average wage growth in the top 25% had slowed to 2.7%.  

“This crisis is not one of scarcity. The crisis is caused by everyone possessing more than the current market can provide,” Samuel Hammond director of poverty policy and welfare at Niskanen Center. We will have to accept higher inflation and higher commodity prices if we desire robust economic growth. This is because it’s a side effect to booming consumer spending.

 

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