Inflation hits the middle class hardest

New research suggests that the middle class is hit harder by inflation than the very rich — or the very poor.

If you’ve spent any time researching cars or even just filling up your gas tank, you’ll have a good idea why this is so.

Far from being “transitional” as policymakers had originally anticipated, high inflation instead appears to be a defining feature of 2022 – and perhaps beyond. A whopping 96% of economists polled for a recent World Economic Forum report now expect American families to face “high” or “very high” inflation for the rest of the year. One of the main catalysts for the gloomier outlook was Russia’s invasion of Ukraine in February, sending energy and food prices into even greater disarray.

The latest consumer price index revealed inflation jumped 8.6% from a year earlier – the highest since 1981 – while core inflation rose 6%. Food and energy prices, although excluded from the “core” inflation indicators that economists look at, pose the biggest challenges to household budgets, given the speed at which prices increased – and the need to regularly buy gas and groceries.

This is one of the main reasons why analysts find that the burden of rising prices is not borne equally. A new report from the Bank of America Institute found that the inflation faced by middle-income families (defined as having an average annual income of around $78,000) in May was equivalent to 9.4% on an annualized basis. .

“Basically, the distribution of 40% to 80%, they face the highest inflation,” says Anna Zhou, an economist at the Bank of America Institute.

Two big culprits are rising car prices (both new and used) and gasoline. BLS data through May shows annual price increases of 14% and 50%, respectively, for these two categories. And sadly, the middle class spends a disproportionate amount of their income on these expenses.

Zhou discovered that the combined cost of buying a car and maintaining it consumes 12.6% of their annual income. In comparison, the richest quintile spends 10.7% of their income on these two things, and the poorest 40% of Americans spend 11.1%.

As inflation has widened to encompass a growing range of goods, including food and utilities, Zhou says that gap could become less pronounced. “Inflation is generalized and manifests itself in all sectors,” she says. “That’s why you see shrinkage.”

The big worry among economists is that Americans will cut back on spending as prices rise, strangling the economy’s biggest source of dynamism and potentially triggering a recession. In fact, Zhou’s research shows that inflation-adjusted spending is across multiple categories of goods, like furniture and jewelry.

She also uncovered some good news, though: Using consumer price data alongside aggregate card spending data from Bank of America, Zhou noted that inflation-adjusted spending in categories of the service sector such as restaurants, hotels and airline tickets are on the rise. This bodes well for the economy.

“Certainly the pent-up demand for services remains resilient and consumers have the ability to pay for it,” she says. “SIf this demand were unleashed, it would really support consumer spending in the short to medium term.

More money :

How to save money during a summer when everything is super expensive

The ‘savings boom is over’ as Americans scramble to cope with inflation

How to save money on gas

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