Hacker News Reader

Comment by sridharvembu | Hacker News Reader

Look at Table 1 in the study, and another far more interesting thing jumps out: inflation perception varies enormously according to income. Low income people report much higher rate of inflation (across gender) than high income people. At the lowest level of income, people report 9+% inflation, while at the highest level of income, it is under 5%. In fact, the difference in inflation expectations based on income swamps the gender difference.

Austrian School economists have anticipated this, and would point out that this is the natural outcome of our monetary policy. Inflation perception is higher at the lowest income groups because inflation is higher for things they purchase. Over time, this effect increases inequality, another effect already observed.

Yet, conventional economic wisdom attributes the rise in inequality not to Fed policy but to technology change (on the "right"), tax-cuts-for-the-rich (on the "left") ...

View on HN

Do the actual statistics bear out the theory that inflation is significantly higher for the things that low-income groups purchase? See, for example, this graph:

http://research.stlouisfed.org/fred2/graph/?id=CPIAUCSL,CWSR...,

From an non-scientific back-of-the-envelope thought process, it would seem that at least the "perception" would be higher.

At lower income levels, a much higher percentage of one's total income is spent for life's basics (i.e., food and fuel being the big two). Therefore any increase in food or fuel costs (both of which have risen rather much the last few years) takes an ever bigger bite out of an already small income pie. Therefore making low income individuals very sensitive to price changes in these basics. Potentially leading to a perception of a higher overall inflation than what is actually happening in the market as as whole.

_Inflation is higher for the things they purchase_

I don't agree with this. The Consumer Price Index is how we Americans typically measure "inflation" which measures the change in retail prices of a "market basket" of goods from period to period. The Bureau of Labor Statistics goes to great lengths to determine this market basket. You are essentially saying that the BLS is favoring a higher income basket over a lower income basket and if they focused on the latter, CPI would report much higher inflation. I don't think this is true. CPI is far from perfect, especially if you introduce Austrian definitions of inflation, but I think they do a good, consistent job. Here is a BLS description of market baskets. http://www.bls.gov/cpi/cpifaq.htm#Question_6

I agree with others who replied to your comment that hypothesize this dynamic is the result of a disproportionate impact to a low income household's bottom line from price inflation. This essentially the concept of operating leverage applied to households. Assume a typical family needs to spend $40K a year to pay for the basics. A $50K household will have $10K left over and a $100K household will have $60K left over. If prices increase by 5% on the $40K, that's now $42K. The $50K household has $8K left over, a 20% reduction from $10K previously. The $100K household has $58K left over, a 3.3% reduction from the $60K previously.

Did you know that according to the CPI, 2/3 of "public transportation" is airfare?

So in the specific area of "public transportation", the basket favours higher-income households. Not that I think this is necessarily representative (public transit is a tiny slice of the CPI, 1.2%); I just think it's surprising and amusing.

> because inflation is higher for things they purchase.

That is easily disproved. It is quite easy to find periods where lower income people face lower inflation, but still estimate higher inflation. (basically any period with food & gas price deflation, which represents a larger component of a lower income basket)

The reason lower income people ascribe a higher number to perceived inflation is because when you live paycheck to paycheck price changes are simply more concerning.

Some of the highest inflation categories are higher eduction, and healthcare which are under represented in lower income baskets.

> "Over time, this effect increases inequality, another effect already observed."

I think you'd need some evidence that the lowest income groups experience higher inflation to make this connection. As distinct from merely reporting a perception of higher inflation.

Further, you'd also want to isolate from other notable observed data, such as stagnant-to-falling wages among the lowest income groups over the last couple generations.

One would expect people with stagnant wages and inflating prices to "feel" the negative effects more than those with inflating wages to offset or match those inflating prices. But that doesn't necessarily mean that the inflation component is the culprit for any perpetuated or exacerbated inequality.

Inflation perception is higher at the lowest income groups because inflation is higher for things they purchase

True. It's also causes more impact because the delta comes out of a smaller pot in the first place.

This would have been my first thought. Another thought is the difference in the effect of wage inflation between higher and lower incomes.

I intuit that people on higher incomes are more likely to see rising salaries in real terms (either by growth-in-job; internal promotion; or selling themselves to the highest bidder).

The other side of that intuition is that those on lower incomes are more likely to be stuck in dead-end jobs, getting whatever across-the-board "cost-of-living" increase their employer decides to award. If (as is often the case) this is below CPI, then the inflation in the cost of their basket of goods is effectively higher for them.

this seemed like another argument for food prices (since i assume they are a larger proportion of total expenditure for low income people). see my other comment here about that...

Reply on news.ycombinator.com