Because the CPI is plutocratic, inflation inequality exists. Low-income people spend more of their budget on food, energy and housing. If (like today) food, energy and housing prices rise more than other prices, low-income people will face a higher rate of inflation than the CPI average.
The UK has recalculated the CPI for different income groups. The bottom half of the UK population by income is facing above-average inflation. These calculations still underestimate inflation inequalities. Low-income people have a limited budget, which limits spending options. A 1kg box of cornflakes is normally cheaper per cornflake than a 500g box of cornflakes, but if you don’t have enough money to buy a 1kg box, you have to buy the box 500 g smaller but proportionally more expensive.
Inflation inequality is generally greater when income inequality is greater. The risk is that inflation inequalities worsen income inequalities. This has social and political significance and makes aggregate data less useful in predicting consumer spending habits.
Main Contributor – Paul Donovan
The content is a product of the Chief Investment Office (CIO).
Read the original blog – Why is inflation bad?, May 27, 2022.