Inflation inequality rises while inflation declines

Inflation inequality is a critically important metric for policy, but continues to remain largely ignored in popular media. When prices go up, not everyone feels the pinch equally. For lower-income families who already spend most of their money on basics like rent, groceries, and gas, even a small increase in prices can be a big deal. Meanwhile, those with higher incomes might not feel the same effect because they have more financial cushion and don’t rely as heavily on those essentials. So, while overall inflation numbers give us a general idea of the economy, they don’t show how tough things can get for some people. The same is true for inflation across regions.

FREOPP has historically pushed policymakers to care about inflation inequality metrics across both income levels and regions. It is more important than ever for the U.S. Federal Reserve Board (“the Fed”) to pay attention.

Since its peak in 2022, inflation has gradually declined to around three percent, leading to calls for interest rate cuts for the Fed’s September meeting. However, those calls may be premature. Headline inflation is an average number and, over the past several months, that average has masked a great deal of heterogeneity in inflation by income group. Indeed, whereas the inflation rate for the top decline has declined to three percent, the bottom of the income distribution has seen its own inflation rate decline to closer to 3.75 percent. That latter number would be unacceptable to policymakers if it were the average.

Figure 1 plots inflation rates by income decile for the bottom, top, and middle of the income distribution. There is a clear gradient: better off households have faced lower inflation even as the average has come down and this gap has widened in the last few months. 

This matters not only because it makes low-income households worse off, but also because it directly gets in the way of policy goals. Low-income households tend to drive monetary policy because they are most responsive to changes in policy. In that sense, the Fed should probably care more about how quickly prices rise for low-income households than for their counterparts higher up the income distribution. Moreover, the fact that this is systematically true across the distribution should push policymakers to reconsider the push for lower rates. 

We need to recognize the current state of inflation inequality to understand why measures like price controls are so popular in the polls. It is especially important because Kamala Harris, the Democratic nominee for president, floated the idea of price controls recently. To proactively engage with people who support them, we have to understand what drives that support and,in this case,tinflation continues to devastate the bottom of the income distribution. 

However, there is not the same degree of systematic inequality across regions. Figure 2 plots inflation inequality by Census region. Only the Mountain region—Montana, Idaho, Utah, Colorado, Nevada, New Mexico, Wyoming, and Arizona—shows divergence from the general trend. Despite having the highest inflation rate during the pandemic, it now has by far the lowest inflation rate over the past several months.

Figure 3 puts income and regional inflation inequality together. In the figure, inflation inequality is the difference between the lowest income quartile and the highest. Regional inequality is the difference between upper Midwest inflation and Pacific inflation. Income inequality has risen in importance for the past several months, while geographic inflation inequality has fluctuated. Putting them together, it is clear that inflation inequality has broadly remained quite elevated.

In sum, inflation inequality remains an important issue even as inflation has declined in recent months. Now more than ever, it is critical for the Federal Reserve to consider that before cutting rates.