Watching the John Landis film ‘The Blues Brothers’ the other night, I had to chuckle during a scene where the brothers were in Chicago’s most luxurious restaurant, and they were warned that the soup was priced at an outrageous cost of $10 dollars. That joke today would have the soup at $30.
Money has been inflating and depreciating the dollar at double-digit rates during the 1970s and early 80s and at single-digit rates ever since. The present dollar is worth no more than 10 cents of the 1970 dollar and 50 cents of the 1980 dollar.
Higher prices can erode the value of real wages and savings, leaving households poorer.
Remember, as Friedman Notes here, Government is the main cause of inflation.
High inflation worsens inequality or poverty because it hits income and savings harder for poorer or middle-income households than for wealthy households. Households that have recently escaped poverty could be pushed back into it by rising inflation.
Lower-income consumers tend to spend a higher proportion of their income overall and on necessities than those with higher incomes, and so have less of a cushion against the loss of purchasing power inherent in inflation. This is what economists mean when they note that lower incomes correlate with a higher marginal propensity to consume.
Policymakers and financial markets participants often focus on “core inflation” (Core inflation is the change in prices of goods and services, except for those from the food and energy sectors), excluding the prices of food and energy, which tend to be more volatile and than the longer-term inflation trend. However, lower-income families spend a large part of their budgets on food and energy.
The poor are also less likely to own assets like real estate, which has traditionally served as an inflation hedge.
While President Biden tells us that there should be no concern over today’s rising prices because they are simply the consequence of a strong economic rebound, the evidence suggests that inflation is depressing economic growth and harming poor Americans the most.