The recent inflationary surge has hit households, with inflation peaking at 9.1% in June 2022 before dropping to 3.4% in April, according to data from TradingEconomics. The Consumer Price Index grew around 2% in the five years leading up to 2020, showing a more stable economy during that time. However, the jump in inflation after the pandemic has impacted everyone’s wallet, with some groups being hit harder than others.
A recent working paper by the National Bureau of Economic Research titled ‘Inflation’s Impact on American Households’ reveals that wealthier households are bearing the brunt of the inflation impact. Due to their higher share of asset income compared to labor income, richer households face larger percentage losses. The impact of inflation on dividends and interest, which contribute more to wealthier individuals, is far greater than on salaries.
The paper indicates that the richest 1 percent experiences nearly 2.6 times the average percentage decline in spending compared to those in the bottom quintile. For example, someone in the top quartile of income would see a 9.84% drop in inflation-adjusted spending if inflation jumped from zero to 10% per annum. This emphasizes how inflation is affecting the spending power of different income groups unevenly.
Richer individuals invest more money into the economy, driving growth and job creation. If wealthy people feel financially squeezed, it could have a negative impact on the overall economy. Investment is crucial for economic growth, and without it, any economy would suffer. Additionally, findings from the paper show that the inflation-tax is a progressive tax, hurting the rich more than the poor in terms of the impact on their wealth.
The inflation-tax, which robs people of the spending power of their savings, has a progressive impact according to the paper. Even if inflation were fully anticipated and financially neutral, it would still have a significant and progressive impact on the average level and distribution of Americans’ lifetime spending. The report highlights that inflation hurts the net worth of the rich more than the poor, creating a concerning wealth disparity due to this un-legislated hit on wealth.
The White House administration may view this progressive impact of inflation as desirable, given its political leanings. However, the addition of nominal tax rate increases to the mix could further impact the economy. It raises questions about the potential consequences of these tax increases on the U.S. economy, especially considering the current inflationary pressures faced by households, particularly affecting wealthier individuals more severely.
