Opinion by Dana M. Peterson for CNN Business Perspectives
Editor’s note: Dana M. Peterson is an executive vice president and chief economist at The Conference Board. The opinions expressed in this commentary are her own.
(CNN) — As consumer prices rise for food, energy, housing and a number of other goods and services, Americans are feeling the pinch. But lower-income families and retirees on fixed incomes will especially feel their buying power erode — not just in the short-term, but for many years to come, further widening the nation’s wealth gap.
To understand why, imagine a family earning less than the median wage of about $58,600 a year, pre-tax. Their after-tax income is even smaller, leaving less room for spending. Using data from the Bureau of Labor Statistics’ (BLS) 2019 Consumer Expenditure Survey, my own calculations reveal that families earning $50,000 or less annually, on average, spend anywhere from 110% to 340% of their after-tax income on rent, food and utilities each year. This means that many of these families are borrowing just to make ends meet.
By comparison, families with average incomes above $50,000 spend as much as 98% of their incomes (e.g., families earning $50,000 to $70,000) to as little as 62% (e.g., families earning $200,000 or more), according to my calculations using the BLS survey. Add in higher prices, and this could likely mean that low- and moderate-income families will need to depend even more on debt to meet basic needs.
Indeed, during the pandemic many low- and moderate-income families and retired persons received stimulus checks, and a portion of these checks were used to pay down debt. However now, as these checks have been distributed and likely already spent, consumer credit (i.e., credit cards, financing) is on the rise again. Moreover, forbearances on mortgage debt, utilities and rent payments are expiring soon, meaning these families will be less shielded from rising inflation.
It’s also important to keep in mind what these households are spending on. Families earning $30,000 to $70,000, pre-tax, spend one-third to one-quarter of their annual after-tax income on food, utilities and rent, according to my calculations using data from the BLS survey. For families making $15,000 to $30,000, the share jumps to 47%, and for families making less than $15,000, it reaches an outsized 116%. Families making more than the median, by comparison, spend between about 7% and 19% of their after-tax income on such necessities.
Rising prices squeeze lower-income families who are already spending a disproportionate amount of their income just to get by. Indeed, the cost of food at home was above its pre-pandemic inflation rate of 1% year-over-year for 13 consecutive months during the pandemic, according to my calculations using data from the Bureau of Economic Analysis (BEA), and at times exceeded 4% year-over-year. The annual inflation rate for meals purchased at eating and drinking places (e.g., restaurants and bars) leapt 5.2% in May, according to the BEA. Meanwhile, energy prices are rising and low housing inventories are constraining the home-buying market.
Inflation is also having a disproportionate effect on items that are not, strictly speaking, necessities, but still should cost relatively less. That eats up the already-small share of income that could be used to build wealth. For example, price inflation for new cars and light trucks was 3.6% year-over-year in May 2021, while the inflation rate for used cars and light trucks, which should be more affordable, is up an astounding 37.9% year-over-year in May, according to the BEA. Gasoline prices are up 56.7%, and car insurance is up 16.9% during that same time period, according to the BLS. These price increases put owning an asset that might be important for maintaining a job — a car, for example — virtually out of reach for many low- and moderate-income families.
But inflation doesn’t only hurt low- and moderate-income households in the short run. It inflicts further damage over the longer term by expanding the wealth gap. As these households are forced to spend more of their incomes on necessities, they have less money to allocate toward saving and investing. That means they miss out on the price appreciation of assets like stocks and bonds.
When households cannot save, they are less able to sock away money for big investments, like home purchases or education, that can create wealth down the line. Families earning more have greater bandwidth to save and invest additional income into assets, like homes, that can build wealth, even as prices for goods and services rise. Households that own stocks or a home, both of which have been rising in value throughout the pandemic, experience increases in their net worth that families lacking these assets do not. Indeed, since late June last year, stock prices in the S&P 500 rose by 39%, according to S&P Dow Jones Indices, and the median price of an existing home is up by about 23.6%, according to the National Association of Realtors. This widens the wealth gap.
Even before the pandemic, the wealthiest families had 170 times the wealth of the lowest-income families, according to Federal Reserve data from the Survey of Consumer Finances. Given rising inflation and greater valuations for assets that generate wealth, the gap between the most and least well-off Americans is widening.
Until the U.S. economy fully reopens, the supply chain for goods is able to meet demand, and policymakers gingerly reverse some of the policies that are contributing to faster inflation, like stimulus checks and super low interest rates, lower-income families will be forced to tighten their belts and will fall even further behind their wealthier counterparts.
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