Washington Post, March 21, 2008: Inflation Hits the Poor Hardest

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By Neil Irwin and Alejandro Lazo
Washington Post Staff Writers
Friday, March 21, 2008; A01

Inflation is walloping Americans with low and moderate incomes as the prices of staples have soared far faster than those of luxuries.

The goods and services Americans consumed in February were 4 percent more expensive than they were a year earlier. But there is a big divide in how much prices are climbing between the basic items people need to live and get to work, and those on which they can easily cut back when times are tight.

An analysis of government data by The Washington Post found that prices have risen 9.2 percent since 2006 for the groceries, gasoline, health care and other basics that a middle-income American family has little choice but to consume. That would cost such a family, which made $45,000 on average in 2006, an extra $972 per year, assuming it did not buy less of such items because of higher prices. For a broad range of goods on which it is easier to scrimp — such as restaurant meals, alcoholic beverages, new cars, furniture, and clothing — prices have risen 2.4 percent.

Wages for typical workers, meanwhile, have been rising slowly. In that same time span, average earnings for a non-managerial worker rose about 5 percent. This contradiction — high inflation for staples, low inflation for luxuries and in wages — helps explain why American workers felt squeezed even before the recent economic distress began.

“It just doesn’t seem like anything is cheap these days,” said Faith Tyler, 41, a personal trainer from Baltimore who has reacted to the higher prices for necessities by cutting back on luxuries. “I don’t eat out very much, no vacations, nothing extravagant unless it’s on sale.”

Inflation is not occurring because labor markets are tight or because the U.S. economy has been overstimulated; if that were the case, wages would be driving inflation up, leaving ordinary households in decent shape and doing more damage to those who lent money at fixed interest rates.

Instead, this inflation is driven by global commodity markets. China, India and other developing countries’ thirst for oil has been growing faster than producers can quench it, sending the price of oil up about 60 percent since 2006. Prices for oil and other commodities fell yesterday though they remain very expensive by any historical standard.

Expensive crude oil has translated into higher costs to heat a house or drive to work. The average middle-income household must spend $378 more per year on gasoline than it did in 2006 if it consumes the same amount, and an extra $38 on fuel oil.

The rapid growth of developing nations, combined with the increasing use of land to produce ethanol, has led demand for food to outstrip supply. That middle-income family is spending $253 more each year on groceries than it did two years ago, assuming it did not change its buying patterns.

The price for dairy products has risen 15 percent since 2006; fruits and vegetables are up 10 percent. Even routine cereals and bakery products are up 8 percent. Tyler, the personal trainer, complained that soy milk is more expensive: “Why is it going up from $3.49 to $4.10 for a gallon? It comes from a bean, not a cow.”

A deeply rooted set of problems in the system has caused health-care costs to rise faster than those of most goods, costing that middle-income family $204 more compared with 2006.

“This is what’s at the core of the middle-class squeeze,” said Jared Bernstein, an economist at the Economic Policy Institute, a left-leaning think tank. “The idea that you can understand the kind of budget constraints that middle-class families face by looking at overall inflation is wrong. You have to look at the core items a middle-class family buys.”

The rise in the basic cost of living means that inflation disproportionately affects those with modest incomes. For example, in 2006, the top 20 percent of households by income spent about twice as much on staples as households in the lower-middle bracket. But the top-earning families had almost six times as much income.

In the Washington area, this has been hardest on families with modest to low incomes whose members have to drive long distances to work. However, incomes here are much higher than the national average, so more families are in the top 20 percent of earners nationwide — those with more than $89,000 in income in 2006 — and are better able to handle the higher prices.

The pinch of inflation from energy, food and health care is a significant factor in softening consumer spending, which in turn is the reason economic growth is slowing sharply this year. It is not the only reason consumers are pulling back, however. Lower home prices, less credit availability and dropping stock market values are other likely factors.

Those different sources of weakness are affecting different groups of consumers. Poor and middle-income people are suffering the worst from inflation, middle- to upper-middle-income families are bearing the brunt of the softer real estate market, and the affluent are pinched the most by problems in financial markets.

“There’s really no segment of consumers that are escaping the slowdown right now,” said Scott Hoyt, director of consumer economics at Moody’s

The fact that inflation is being driven by commodities has made it tricky for the Federal Reserve as it tries to prevent the downturn from becoming a deep recession. The Fed’s interest-rate cuts, for example, have contributed to a decline in the value of the dollar, which is one reason for higher prices. The central bank forecasts that prices for fuel and food will level off this year, but that could prove wrong. But in the Fed’s view, there is not much it could have done to prevent the run-up in prices for working-class Americans over the past year, given the international origins of the inflation.

For now, the inflation in staples is forcing people to adjust.

“Everything is going up,” said Ren Chavez, 72, of Wheaton, speaking Spanish and sitting in the food court at the Wheaton Mall. “I have a car but now I take the bus, even if it is cold . . . my money now has less value,” he said. “I go into a store with $6 and, imagine it, it isn’t worth anything.”

“Everything has gone up, eggs, milk, everything is very high, and we don’t have a remedy,” he said. “We have to eat.”

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