The fact that inflation has returned after being largely absent in the United States economy since the early 1980s has received a great deal of coverage in the media. As a result, most of the negative implications of the current surge in inflation are well documented. The increases in consumer prices reduce the purchasing power of everyone in the country. However, the impact of inflation is far from uniform as we look across the wealth spectrum.
When we consider the short-term impacts of inflation, the disproportionate effect on lower-income individuals is easy to see. In the case of families with a combined income below the median wage, virtually all of their after-tax income is spent on necessities such as housing, food and utilities. For families in this situation, rising prices force them to make hard choices with respect to consumption, substituting one item for another in attempts to stretch their budgets or, in some instances, exceeding budgets and using debt to make ends meet. Even though they face trade-offs as inflation sets in, people with higher incomes can meet basic needs more easily because they have a larger financial cushion. That, alone, dramatically reduces the economic pain associated with price increases.
Given how long it has been since we’ve had significant inflation, it is only natural to focus on short-term impacts and the challenges they pose for society. These impacts are all around us and are immediately noticed as we go through our daily activities. However, the long-term impacts of inflation are potentially more concerning.
The growing wealth gap in the United States has garnered increasing attention over the last decade. An unfortunate truth of the current inflationary environment is that it can make the wealth gap exponentially greater. For example, many families at the lower end of the income spectrum struggle to reach a point such that they can afford to save for retirement, even with employer-sponsored programs that provide matching contributions. The cost associated with delaying the start of the process is tremendous in terms of their ability to accumulate wealth.
Similarly, families trying to save for future educational expenses may have to give up this dream, or at least postpone contributions. These decisions have grave consequences concerning future earning potential that extends across generations. Homeownership is another dream that takes a major hit during inflationary times. First, housing affordability declines significantly as mortgage interest rates rise and rising home prices make the dream of home ownership a moving target. Additionally, rents tend to increase in inflationary periods, making it more challenging for renters to accumulate enough wealth to become first-time homebuyers.
For homebuyers who also have a degree of wealth and considerable retirement, or other kinds of savings, the impact of inflation is somewhat tempered by the increases in the prices of real and financial assets. This provides us the luxury of focusing on the immediate economic discomfort of declining purchasing power. However, it would be very short-sighted of us to ignore the significant impact inflation has on the wealth gap.
H. Shelton Weeks, PhD, is a professor of finance and director of the Lucas Institute for Real Estate Development & Finance at Florida Gulf Coast University.