(NerdWallet) – In December, the prices of all goods and services had risen more in a single year than they had in nearly 40 years. The impact of this 7% increase is expected to hit already vulnerable Americans the hardest.
A 7% increase may leave high earners indifferent. Others, even with some savings and discretionary income, can take action such as replacing cheaper products, driving less to save on gas, or dipping into their savings if needed. This privilege allows financially comfortable Americans to minimize the impact of inflation. Many may think “if I don’t feel it or if I can make adjustments, that’s okay”. But it’s a potentially disastrous problem for as many as 40% of Americans.
It is those with the lowest incomes, the working poor and even middle-income people who will bear the brunt of inflation. These segments are less likely to have savings to fall back on, often have to spend more than they earn just to get by, and spend more of their income on essentials like food and shelter than higher income people.
A look at spending and pricing data illustrates how.
Low-income people have fewer options to manage higher prices
Without the emergency savings buffer, an unexpected car repair or a 25% increase in the cost of heating a home can be difficult to afford.
While the average personal savings rate has peaked during the pandemic, lower incomes have depleted those savings faster. Low-income households still had 70% more in their bank accounts in September 2021 than before the first round of pandemic-related stimulus payments, but that was only a $1,000 surplus, according to data from the JPMorgan Chase Institute. That surplus is just one month of typical rent and utilities, according to 2019 census data, while three to six months of basic living expenses are considered a solid emergency fund.
Also, when things get too expensive, many consumers can substitute cheaper items. This is not the case if you are already buying generic brands in order to save money on a tight budget. When you’re already bargaining in store to stretch your grocery budget, for example, there’s no cheaper alternative available.
Low-income people already spend all or most of their income
The highest-income households spend 65% of their after-tax income, according to 2020 consumer spending data from the Bureau of Labor Statistics. This allows them to save and invest more, not to mention travel, buy more things from their “needs” list, and donate to charity. But when you spend most or all of your income on the things you need, a significant increase in the cost of food, gasoline, or any other class of necessary goods or services can be detrimental.
The lowest-earning households, those in the bottom 20%, spend about 190% of their after-tax income each year, according to the BLS. This group receives more government assistance, income tax refunds and pandemic stimulus money, the data shows, but those sources are included in income calculations. Those earning around $24,000 to $45,000, more likely to be defined as working poor, spend 110% of their after-tax income each year. Middle-income earners, those earning around $45,000 to $76,000, on average, spend 89%.
How do people spend more than they earn? Particularly when dipping into savings is not an option, the answer is: by going into debt. Accumulating debt can have long-term cumulative effects, especially when you are unable to pay it off quickly, if at all. Even those who spend nearly 90% of their after-tax income are one unexpected medical bill or a steep gas price hike away from resorting to using credit cards or high-interest loans. for essential expenses. They have little or no choice and the cost of many essential expenses is rising.
Low-income households spend less on food out of necessity. However, as these households have more modest budgets, food accounts for around 14% of total expenditure for households with the lowest incomes, compared to 12% for households with middle incomes and 11% for households with the highest incomes.
When prices go up, those who spend most of their money on something are the most likely to notice the change.
Food prices have risen 6.3% over the past 12 months, according to the December consumer price index from the Bureau of Labor Statistics. This is the highest year-over-year growth rate since 2008, and before that, since 1990.
What this looks like in practice: A family spending $500 a month on groceries, for example, would spend $530 after a 6% increase. At $500 per month, daily meal costs come to about $17. The extra $30, due to inflation, would equal two days worth of meals.
Shelter and utilities
Housing costs have not risen as sharply, at 4.1% over the past 12 months, but this represents the highest inflation in this category since 2007 and is above the Federal Reserve’s target inflation rate of 2% or less. While this slight pick-up in pace may be tolerable when other prices remain constant, we know that wasn’t the case at the end of 2021 and it isn’t now.
Utilities account for 9% to 10% of spending among the two lowest income groups, according to the BLS, compared to 7% to 8% among middle incomes and 5% among the highest incomes. Prices for energy services (including gas and electricity) have increased by 10% over the past 12 months. For those dependent on natural gas for their utilities, the increase is 24%. This is especially detrimental now that winter is making it harder for cash-strapped households to keep their homes warm.
People with the highest incomes spend about 2% of their income on gasoline, compared to 3% in other income groups. Although this is a relatively small share of spending, overall gasoline prices have increased by 50% over the past year. December was the ninth consecutive month of increases above 40%, the longest period of such high price growth since 1980.
Workers who rely on public transport will likely see increased costs passed on to them in the coming year, but this category has so far been shielded from significant price growth. However, for low- and middle-income people who currently rely on gasoline to get to and from work, the price increases are significant.
If a commuter was spending $100 a month on gas a year ago, they’d be spending $150 now, and that money has to come from somewhere — it’s unlikely to be the stretched grocery budget or the light bill.
Low-income workers are also less likely to have the option of working from home. They are disproportionately represented in industries where their physical presence is a requirement: retail, hospitality, and production and manufacturing, for example. In fact, high-income people were much more likely to work from home due to the pandemic, according to household census data.
Facing the financial crisis
Inflation, unexpected bills or a drop in income – any of these factors can put a middle or low income household in a precarious situation. If you are well protected from the effects of inflation, consider supporting a local food bank or other local charities. If you find yourself unable to pay bills and expenses:
- Prioritize the essential. Food, shelter, and medical care should be top priorities when your budget is at breaking point. You can rebuild your credit; it is more difficult to regain physical and mental well-being.
- Call your creditors. Don’t wait for them to call you. Whether it’s a utility or credit card bill you can’t pay, you might be able to work out a payment arrangement or at least avoid the worst outcomes.
- Don’t be afraid to ask for help. There are government, private and charitable resources available for people in financial crisis. The 211.org website, a United Way service, is a good place to start. You can also call 211 for the same services.
- Start small with savings. Once you’re out of the danger zone, setting aside even a few hundred dollars as an emergency fund can help protect you from unexpected bills. Every little bit counts, and if accumulating multiple months of spending seems overwhelming or impossible, smaller goals get you started in the right direction.
Average share of after-tax income spent calculated using average annual expenses and average after-tax income of “consumption units,” as defined by the Bureau of Labor Statistics. Source: Consumer Expenditure Survey 2020, US Bureau of Labor Statistics.
Lowest, middle, and highest incomes refer to the lowest two, middle two, and highest quintiles of the Bureau of Labor Statistics’ 2020 Consumer Expenditure Survey.
All inflation data are unadjusted US city averages. Source: December 2021 Consumer Price Index, US Bureau of Labor Statistics.
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