As an Economics A Level student and someone who has applied to read Economics at university, the constant talk about current UK inflation inspired me to explore inflation and its effects. I soon realised that it had extensive, disproportionate effects on different and individuals. With research, I attempted to determine which groups had more negative impacts.
Everyone is affected by inflation; however, I believe multiple factors change the magnitude of our struggles.
It is fair to argue that deprived households will be most affected. The chain of reasoning tends to follow the idea that the poor save less since they must spend a larger proportion of their income on necessities. This then means that when the economy experiences inflation, they have less protection than those who save more. Cowen introduced the idea that inflation acts as a ‘regressive consumption tax’ mainly because cash balances are ‘often the pathway to consumption for poorer income groups.’ This shows how a rise in inflation can have a disproportionate impact on low-income households. A further reasoning would be the idea that poorer households ‘spend a larger proportion of their income on energy bills’
^FIGURE 1 SHOWS AVERAGE EXPENDITURE SHARE FOR LOW-INCOME AND HIGH-INCOME HOUSEHOLDS (Office for National Statistics, 2022).
Households can face different inflation rates depending on their consumption patterns. This is because some goods prices rise more than others. In figure 1, low-income households spend around 70 parts per 1,000 more on ‘housing water electricity gas and other fuels’. This shows how low-income spending patterns can lead to inflation inequality as this sector has seen one of the largest price increases, with the CNBC stating that ‘The largest upward contributions to the inflation rate came from housing and household services, primarily electricity, gas and other fuels, along with transport’. Behavioural changes can also cause inflation inequality. When inflation occurs, different groups react differently to the rising prices. Claeys and Guetta-Jeanrenaud gave a perfect example of how ‘if low-income households have a harder time smoothing their consumption given rising energy prices, the relative importance of energy in total expenditure will rise faster for low-income households, increasing inflation inequality’.
Even though there is clear evidence that the poorest of households tend to struggle the most with inflation, there are also arguments against, that suggest that these households could also benefit from inflation. The strongest argument for this is that inflation can reduce the real value of debt. In 2018, three million households were in debt, with the poorest families being ‘hit the hardest.’ This figure would likely be higher in 2022, since the pandemic left many people unemployed. The idea behind this is that if prices and income go up, your debts, which are usually fixed in nominal value, are worth less. This could then lead to a redistribution effect, where wealth is redistributed from lenders to borrowers. This tends to benefit low-income households more as they tend to be the ‘borrowers’. It is however important to note that, right now, real wages are falling. Therefore, repaying debts will eventually be more affordable ‘in inflation adjusted terms’, but not at the moment. Another argument that supports the idea that deprived households can also benefit from inflation relates to spending patterns. As mentioned above, housing costs have seen one of the largest price increases. Lower income households spend a larger proportion of their income on these costs and so are impacted to a larger extent. It was also mentioned that transport costs have seen an equally high increase in price. Figure 1 shows that high-income households spend a larger proportion of their income on transport costs. The media has been particularly vocal about the rises in price of petrol and as of late June ‘Petrol reached new high of 191.05p a litre.’ Restaurants and hotels, recreation and culture and health have also seen rises in price. These are services that high-income households are spending a larger proportion of their income on and therefore the lack of spending by low-income households in these areas can provide protection from the effects of inflation.
Moving away from the economic identity of a household, I also want to explore social factors that can affect the extent in which you are impacted by inflation. Gendered expectations suggest that the woman/women in a household conduct more ‘household shopping’. This would mean that women are held more responsible to purchase goods, such as food, that are rising in price. This can lead to women feeling the stresses of inflation ‘more acutely’. The article published by the institute for women’s policy research also stated that prices of women’s clothes has been increasing at a greater rate relative to men’s. This is an example of how your gender could potentially affect the way you experience inflation, with suggestions that females are more negatively impacted. Inflation can also negatively impact certain demographics more than others. A research report by the Bank of America stated that ‘African American, Hispanic and Latino communities, and those not living in cities have been spending more of their post-tax income on goods and services.’ The study found that ‘the spending power shock from these higher inflation categories was 4% for African American, Hispanic, and Latino groups, compared to 2.9% for everyone else.’ And that ‘The divide was similar for rural versus urban populations. The former experienced a shock of 5.2%, while the latter saw one of 3.5%.’ Although this information results from American populations, I believe the principal argument could still be applied to the UK.
Overall, I believe that your economic and social circumstances have a large effect on the extent to which you are negatively impacted by inflation. As it seems, being from a low-income household, as well as being a woman of colour, will maximise your likelihood of being negatively impacted. Focusing on a household’s financial status, it is clear that above all, low-income households will be most affected. According to the institute of fiscal studies, the bottom 10% of households face an inflation rate that is three percentage points higher than the top 10%. Combined with the fact that state benefits have only increased by 3.1% in April, low-income households are clearly a target for inflation’s unyielding dagger.
Juliette, UVI
Minister for Learning on School Parliament
Photo Credit: Image by SteveBulley from Pixabay
