How Inflation Reinforces Economic Disparities

By: Adewale Maye

Economic inequality comes in all shapes and sizes in the United States. Wealth and income disparities specifically plague many middle- and low-income people, pushing them further into poverty. These inequalities stem from our economy’s structural and systemic barriers that limit access to socioeconomic mobility. Low-wage jobs, inadequate worker benefits, unpredictable scheduling for low-wage hourly workers, and insufficient opportunities for career advancement and growth all exacerbate the divide between wealthier Americans and middle- and low-income households. We see the impact of these disparities more acutely across gender, racial, and ethnic lines.

Despite wide understanding that economic justice is stymied by income and wealth disparities, inequality pervades all facets of the economy. We are constantly learning more about how economic inequality ensures that the wealthy maintain their wealth and prevents many low-income households from attaining economic prosperity. And in a recent study, there is a growing concern for a new and burgeoning form of economic inequality described as inflation inequality. 

Inflation is defined as the increase in prices of goods and services over time. People with higher incomes can offset rising inflation with rising incomes. Sadly, though, income inequality and rising inflation can entrap lower-income households in poverty. In addition, research has shown that prices may rise more quickly for those who have lower incomes, a phenomenon called inflation inequality.

The study illustrates how the changes in income distribution affect differences in product innovations. In other words, a rise in income for wealthy households spurs innovation in products that high-income households buy. This innovation is measured by the entry of new products that wealthy households consume such as craft beer, organic foods, and branded drugs. With an increase in a variety of goods, or an increase in competition, businesses often set lower prices so their goods are more competitive. The paper concluded that because high-income consumers see more innovative products targeted at them and buy a larger variety of products, businesses lower their prices. However, businesses offer less variety and innovation in low-cost goods, and these goods saw higher prices over time thus producing inflation inequality.

This research shows how inflation inequality is magnified due to income inequality. As high-income households get richer, firms offer new products at a lower inflation rate to cater to these consumers’ preferences. On the other hand, lower-income households see higher inflation rates and less variety with low-cost goods like generic, non-branded paid medication and non-organic, low cost groceries. With higher inflation in goods like non-branded medication and inexpensive groceries that are relatively cheaper and more accessible to low-income households, low-income people may not be able to afford goods that are critical to their health needs or the needs of their families. This cycle is just another way to keep low-income households impoverished and economic opportunity inaccessible.

Now more than ever, low-income households need equitable solutions to combat economic inequality, address their socioeconomic needs, and lift them out of poverty. For low-wage workers specifically, an investment in federal policies such as the Healthy Families Act, Family and Medical Insurance Leave (FAMILY) Act, Schedules that Work Act, and Raise the Wage Act—along with ensuring that quality labor standards are enforced—can help low-income workers and their families become more economically secure and create pathways to an economy that works for all.

As policymakers, researchers, and advocates working together to address growing inequality, we must recognize how economic inequality has transformed over time, especially through inflation, to keep low-income people economically marginalized. We must also push to enact policy proposals that combat inequality.