- Biden and Fed Chairman Jerome Powell have said throughout 2021 that higher inflation will be temporary.
- Most Republicans and some Democrats seem increasingly worried about being wrong.
- Harvard research shows the wealthy feel the pinch more – and that may have to do with who looks worried.
This summer, bankers and business leaders seemed in a panic about high and bad price inflation that is ruining the economy. Earlier this month, billionaire investor John Paulson sounded the alarm and claimed there would be a gold rush.
But on Tuesday, the official U.S. government inflation measure showed consumer prices cooling for the second month in a row, suggesting concerns were overblown.
President Joe Biden and Fed Chairman Jerome Powell represent a “transitional team” – those who say these dramatic price increases are only temporary and could in fact be good for the economy, as they signal that wages are also on the rise.
New research from Harvard economist Alberto Cavallo shows both sides were sort of right: Inflation has been worse for the rich, and it seems very transient for everyone.
Cavallo’s work examines how measures of inflation like the Consumer Price Index, released by the Bureau of Labor Statistics, are built around “consumption baskets,” which are based on annual surveys. that ask people how they spend their money.
The results of these surveys are used to determine what the average household spends on different things such as food, shelter, cars, education or health care.
Cavallo examined what Americans in the top and bottom fifths of the income distribution spent money on, adjusted by real-time spend data that showed how these patterns have changed during the pandemic.
The surveys used by the BLS to construct the baskets show that low-income households spend more of their money on things like groceries and housing, while richer households can afford to spend a higher percentage of their money each month on things like transportation, recreation and restaurants.
Additionally, the COVID-19 pandemic has thrown consumption patterns into chaos over the past year and a half. Since the headline CPI is based on consumption baskets that are only updated about once a year, the normal measure of inflation may ignore how changes in spending interact with rising prices between. different categories.
Cavallo tracks inflation based on adjusted consumption baskets since last fall, while inflation was extremely low. Back then, low-income households saw prices rise more than high-income homes, but that trend has changed.
The prices of things the richest Americans spend more money on, like plane tickets and new cars, have skyrocketed amid reopening and supply chain disruptions, overtaking categories such as grocery shopping and housing costs have remained relatively stable, in part due to interventions such as mortgage forbearance and a moratorium on evictions.
Inflation is certainly an economic reality in the United States, but its actual impact ultimately depends on what you buy.
And in 2021, those feeling the impact of inflation the most are Americans who can probably afford it.