We can’t keep ignoring the ties between inflation and economic justice

Federal Reserve Chairman Jerome Powell answers questions during a House Financial Services Committee oversight hearing of the Treasury Department's and Federal Reserve's Pandemic Response on Wednesday, December 1, 2021.
Greg Nash

The upcoming release of the Consumer Price Index (CPI) is an important opportunity to address the social justice challenges created by surging inflation. There is no typical U.S. consumer, yet the basket of goods used to calculate CPI makes that simplification — and it is to the detriment of the poor and the elderly. 

Rich people and poor people have very different baskets of goods that they purchase on a monthly basis. Right now, inflation is higher on the basket of goods purchased by poor Americans. Basing the Consumer Price Index on a basket of goods for a typical household is an outdated idea. We have the computing power and analytic capability to provide a far more robust inflation dashboard to policymakers so they can properly understand the divergence of inflation experiences realized by a cross-section of the nation. 

For a just economy, the U.S. government needs to build modern inflation indicators that allow policymakers and central bankers to better understand how inflation impacts different demographic groups.   

Should central bankers be more concerned about maintaining the purchasing power of the poor, or the rich? It is a policy question that is never discussed, yet it is an important one. If central bankers were more concerned about maintaining the purchasing power of the poor, perhaps they would tighten sooner as inflation surges. Let’s take a closer look at the problem:

The United States Bureau of Labor Statistics openly states on its website that the Consumer Price Index “does not produce official estimates for the rate of inflation experienced by subgroups of the population, such as the elderly or the poor.” In other words, the specific impact of inflation on poor and older Americans is not taken into account when the Federal Reserve, Congress and the president make decisions about inflation policies. Yet, poor people and the elderly are the most vulnerable to the impact of inflation on their purchasing power. This problem is magnified for lower-income elderly and disabled Americans because the cost of living adjustment (COLA) used to adjust social security payments is linked to a basket of goods that does not reflect their experience as consumers. 

This seemingly dry topic of calculating inflation indicators can have heartbreaking consequences. 

According to the United States Census Bureau, 37.2 million Americans live in poverty. And poverty in America is not race or gender-neutral. The poverty rate among men is 10.2 percent, while the poverty rate for women is 12.6 percent. Especially notable, the poverty rate for a family headed by a female is 23.4 percent, while the poverty rate for a family headed by a male is 11.4 percent. While 11.4 percent of the country overall lives in poverty, 8.2 percent of whites meet this definition, while 17 percent of Hispanics and 19 percent of Blacks fall into this category. Tragically, 16 percent of all children in American live in poverty. The poverty rate for the disabled is a staggering 25 percent. 

So when inflation surges more for the basket of goods purchased by poor people than the basket of goods purchased by the rich, the impact falls more on women, children, Hispanics, Blacks, and the disabled. 

A closer look at the data reveals why it is time for a new approach to inflation accounting, inflation indicators and central bank policy formulation. A recent study by the University of Pennsylvania found that low-income families in the bottom 20 percent of American households spend substantially more of their income on food, energy and shelter than higher-income families (62.3 percent vs. 50.8 percent). They also spend substantially less on services (24.6 percent vs. 30.8 percent) than the rich. As a result, in 2020, the poorest households had a 6.8 percent increase in their expenditures, while the top 5 percent had a 6.1 percent increase in their costs. 

These differences, while substantial, mask significant variations in how inflation impacted key budget categories of the rich and poor. 

The Bureau of Labor Statistics released its 2020 report on consumer expenditures just days ago. This level of detail, released a year after the fact, is not included in the monthly CPI data that is used by policymakers. 

The report shows the poorest 20 percent of American households witnessed a 6.8 percent increase in housing costs, while the richest 20 percent experienced only a 0.9 percent increase. Yet, none of these differences will be discussed when CPI for December 2021 is released on Jan. 12. The data in the report does not provide this level of detail.  

It’s time to begin the important national conversation about social justice and inflation accounting. 

Jonathan Lewis is president of Signatory Capital Advisors, a firm that advises clients on environmental, social and governance policy integration. 

Tags bureau of labor statistics Consumer Price Index economy Economy of the United States Financial economics Inflation Macroeconomics Money Poverty in the United States Price indices Real versus nominal value
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