How Inflation Taxes the Poor

A house on a terraced street in Burnley, UK


Anthony Devlin / Bloomberg News

The UK on Wednesday reported its highest inflation rate since 1982 and welcomes you to the 40-Year Club with the US A new generation on both sides of the Atlantic is learning to fluctuate. Volatile prices can destroy an economy. And in that spirit, a brief research note from a London-based consultancy is well worth a closer look.

The UK’s official consumer price inflation rate this week was 9% in April, but not everyone has suffered equally. For the first time in this inflationary cycle, Britain’s poorest households experienced the biggest price increases, according to calculations by the Institute of Fiscal Studies. The lowest 30% of households have seen their prices increase by at least 9.7% and as high as 10.9%. The top 10% of earners say their prices “only” increased by 7.9%.

This is because people at different income levels spend different proportions of their income on different goods and services. Such a “consumption basket” is an indispensable if little discussed factor in calculating the inflation rate. UK inflation was driven by rising energy costs, with home electricity and natural gas bills rising 54% in April. As energy makes up a higher share of low-income households’ budgets – 11% of total spending, compared with 4% of those on the highest incomes – low-income Britons feel the level of inflation is high. more severe energy prices.

Inflation acting as a highly regressive tax on lower incomes is well known in economic circles. But the misery experienced by low-income Britons is not an abstraction. And it is becoming a political liability for Prime Minister Boris Johnson, whose climate measures have done so much to push up energy prices. Don’t be surprised if President Biden and US Democrats are the next to learn politics in this economic reality.

Magazine Editorial Report: Paul Gigot interviews former Trump economic adviser Kevin Hassett. Image: Getty Images / Bloomberg News / Reuters Synthesis: Mark Kelly

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