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Answering Questions About Inflation Inequality

On Monday, I reported that the rich and poor are experiencing a faster rate of inflation than the population as a whole. The article has generated a lot of discussion, and readers have raised some great questions. I’ve been doing my best to respond in the comments, but I wanted to provide a more detailed answer to two questions: one about my findings and one about their implications.

Is it fair to use the same rate of inflation for rents across the country? My analysis assumes prices change the same way in all parts of the U.S. — that the price of milk in Oregon and South Carolina is rising at the same rate. That’s an oversimplification, but for most items the differences are relatively minor. The headline rate of inflation in 2013 varied by two-tenths of a percentage point between the Northeast and Midwest (1.4 percent) and the South (1.6 percent). The West split the difference at 1.5 percent.

But rent is a different story. The rate of rent inflation ranged from 2.2 percent in the Midwest to 3.1 percent in the West, with even greater variation among individual cities.

This is an important issue, because rising rents were a major driver of the faster rate of inflation experienced by low-income households. But that assumes the poor have seen their rents rise at the same rate as everyone else. If rents are, in fact, rising faster for people in wealthier areas, my analysis may overstate the rate of inflation experienced by low-income households. On the other hand, if rents are rising faster for the poor, then their actual rate of inflation is higher.

To examine this question, I reran a slightly simplified version of my analysis for the four broad regions defined by the Bureau of Labor Statistics: the Northeast, South, Midwest and West. I used national-level data for all prices except rents, where I used the regional data. Turns out, not much changes. The inflation gap between the poor and the overall population is a bit wider out west, where rents are rising fastest, and a bit narrower in the Midwest. But in all four regions, low-income households are experiencing modestly higher inflation.

Of course, these are very broad regions. Rents are rising much faster in San Francisco than in California’s Inland Empire, and faster in some San Francisco neighborhoods than in others. To answer this question properly, we’d need neighborhood-level data to see whether rents are rising faster in wealthier neighborhoods. That isn’t possible from BLS data, but Josh Lehner at the Oregon Office of Economic Analysis looked at data from Zillow, an online real estate database, and found that rents tend to be rising more quickly in wealthier ZIP codes. That deserves further study, although a back-of-the-envelope calculation suggests that even factoring in that trend, the poor are still seeing a modestly higher rate of inflation than the population as a whole.

So, if inflation is hitting the poor the hardest, is inflation too high? Inflation is running well below the Federal Reserve’s target of 2 percent per year, even as unemployment remains above what most economists consider a normal level. That has led many liberal-leaning economists to argue that the Fed should be doing more to stimulate the economy (which would tend to drive inflation up and unemployment down). But if inflation is higher for the most vulnerable households, doesn’t that mean inflation is already too high?

Not necessarily. For one thing, inflation remains low no matter which group you look at. Even low-income households are experiencing less than 2 percent inflation on average. Moreover, moderately higher inflation wouldn’t necessarily be bad for the poor, as The New York Times’ Paul Krugman noted Monday. Inflation, all else equal, is good for borrowers and bad for creditors, because most debts aren’t indexed to inflation. Since the poor are much more likely to be net borrowers, inflation can help make their debts more manageable. (Then again, as economist Tyler Cowan argues in a response to Krugman’s piece, the wealthy have more ways to avoid inflation — by investing overseas, for example.)

As I hinted at the end of Monday’s article, it’s important not to look at inflation in isolation. If higher inflation comes as the result of faster economic growth and lower unemployment, it will probably be accompanied by wage growth. The last time the U.S. saw strong income gains for low-wage workers was the late 1990s, a period of low unemployment, rapid economic growth and inflation moderately above the Fed’s target.

None of that, by itself, means the Fed should be targeting a higher rate of inflation. But the recent trend of diverging rates of inflation doesn’t necessarily argue against it.

 

Ben Casselman is a senior editor and the chief economics writer for FiveThirtyEight.

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