How Much Does Inflation Vary by Income? Depends on How It’s Measured

In June, the U.S. Bureau of Labor Statistics (BLS) announced the largest 12-month increase in the Consumer Price Index for All Urban Consumers (CPIU) since 1981 – a rate of 9.1 percent. The rise in inflation was driven primarily by higher prices for gasoline, housing, and food. Although inflation has moderated somewhat, it still remains very high. The question is the extent to which the effects of inflation vary for households with different income levels. This brief addresses the distributional question with a straightforward analysis that weights the eight major categories in the CPI-U by expenditure data from BLS’s Consumer Expenditure Survey (CEX) for each income quintile. The confounding issue, however, is that low-income households spend virtually all their after-income-tax money on inflation-affected items, while high-income households spend only 80 percent of their resources on these items. The discussion proceeds as follows. The first section summarizes recent research on inflation by household income. The second section describes the CPI-U and expenditure data from the CEX. The third section discusses the methodology. The fourth section presents the results, which show that inflation rates for the 12-month period ending in June 2022 for items included in the CPI-U are roughly similar across income groups. The final section concludes that, despite facing similar inflation levels, low-income households spend virtually all of their income on affected items, exposing a larger share of their resources to price increases compared to high-income households.