Inflation and inequality

Back in 2014, in a post on inflation, I revealed my suspicion that

the real rate of inflation for consumer goods is higher than the official rate of 2.2 percent (over the past 12 months), thereby understating the extent to which working people are facing rising prices for the commodities they need to purchase in order to maintain themselves and their families.

Well, as it turns out, I was right. According to some recent research by Xavier Jaravel, the rate of inflation faced by high-income households is lower than for low-income households.

Why’s that? Because, with rising inequality, firms in the retail sector introduced more products catering to high-income consumers, and competitive pressure in that segment of the market drove down the prices of those products.

And why does it matter? Well, for one, any overall measure of inflation (like the Consumer Price Index) tends to understate the rate of inflation facing low-income consumers. That’s the point I made back in 2014.

The other implication is that, because households with different amounts of income face different prices for the goods they consume, economic inequality is actually worse than we thought.

So, here we have another vicious cycle: nominal economic inequality leads to different rates of product innovation (thus leading to different levels of consumer prices), which in turn worsens the degree of real inequality.

That vicious cycle of escalating inequality is, unfortunately, part of the normal workings of our current economic institutions.