Prices are climbing all over the place as the economy is reopening. But for lower-income earners — who were already hit hardest by the pandemic — the sudden price spikes are squeezing their budgets even further.
When necessities get more expensive, consumers with less disposable income, who already spend a bigger share of their money on essentials, feel it first. In 2016, researchers from the Hamilton Project, part of the Brookings Institution, found that low-income households spend a higher percentage of their budgets on basic needs — housing, food, transportation, health care and clothing — than they did three decades ago.
The pandemic has exacerbated America’s inequality problem, and lower-income workers have been disproportionately affected by economic hardship over the past year. Many of the millions of jobs lost to Covid-19 shutdowns were in sectors that typically pay lower wages, such as hospitality. And even though that industry is recovering, in April it was still short 2.8 million jobs compared with February 2020.
The inflation spike that we’re now seeing as a result of the reopening is a good sign for the economic rebound. But it is also the latest example of why the pandemic has been harder for those at the bottom of the income ladder.
So far, price increases haven’t curtailed consumer spending, a major driver of the US economy. But if prices rise too quickly and severely, consumers will pump the brakes, and that could have huge consequences for economic growth.
US consumer prices in April increased 4.2% from a year earlier. It was the biggest 12-month increase since September 2008, the height of the financial crisis.
The prices producers are receiving for their goods rose 6.2% year-over-year in April. It was the biggest increase since 12-month data was first calculated in November 2010 and a bigger advance than expected.
When costs rise, low-income households are forced to make trade-offs.
“Low-income families live paycheck to paycheck, so something has to give,” said Mark Wolfe, executive director of the National Energy Assistance Directors’ Association.
“Based on our surveys, when families face unaffordable bills they cut back on essential purchases including food, medicine and clothing,” he added.
Paying up at the pump
Higher energy costs have been chiefly responsible for overall price increases in recent months, but that wasn’t the case in April, when used cars, airline fares and furniture were among the items with the steepest price jumps. But this could change again in May: The Colonial Pipeline hack led to higher gas prices and drivers lining up at gas stations to fill their tanks.
Higher prices at the pump are a bigger problem for lower earners. A 2015 report from JPMorgan (JPM) found that lower-income households see the biggest increase in purchasing power when gas prices go down.
“Gains in discretionary spending from lower gas prices disproportionately accrue to low-income individuals,” the report said, citing a January 2015 drop in oil prices that resulted in a 1.1% monthly income savings for low-income individuals. In comparison, the savings for those earning more than $79,700 were just 0.3%.
Wolfe said that while there are federal and state programs to assist with food, health care and housing costs, no such program exists to help with prices at the pump.
“Nobody is subsiding it. You’re on your own with that,” he said.
Other energy costs are similarly essential and expensive.
Electricity prices jumped 1.2% last month and were 3.6% higher than a year ago.
Electric and water bills combined account for an average 3.1% of the average US household’s net income, but they command an average of 20.6% of net income among households in the lowest 10% of earners, according to a 2020 analysis by Carlos Martin, a senior fellow at the Urban Institute. Martin analyzed the government’s consumer expenditures data.
The pandemic wreaked havoc on the food industry.
Initially consumers were hoarding food at home and no longer going out to restaurants, which led to a spike in prices at grocery stores. Even though that has leveled out some, food prices are still up and that, too, has a disproportionate effect on low-income households, which spend a bigger share of their cash on food.
In 2019, households in the lowest income quintile spent an average of $4,400 on food —representing 36% of their income — while households in the highest income quintile spent an average of $13,987 on food, representing 8% of income, according to the Department of Agriculture.
In April, food prices were up 2.4% from the year before. Prices for fruits and vegetables were up 3.3% over the same period.