Carney: Welcome to Biden’s America, Where the Poor Pay More

The first two months of the presidency of Joe Biden have not been a particularly auspicious period in which to be black, poor, or working class in America.

The unemployment rate for black Americans fell for eight consecutive months as Donald Trump’s tenure in the White House marched toward its end, falling from 16.7 percent to 9.2 percent in January, one of the swiftest decline in unemployment in recorded economic history. It jumped back up to 9.9 percent in February and only slightly recovered to 9.6 percent in March.

It isn’t just black Americans that are suffering. Lower-income Americans of all races have also seen setbacks in the early months of the Biden administration.

The latest data on prices from the Bureau of Labor Statistics shows that prices jumped much higher than expected in March. The annual gain of 4.2 percent is the highest since 2011, although this is somewhat of a statistical illusion created by the depression in demand for goods and services after our political leaders ordered everyone to shelter at home to protect themselves from Covid-19. But even the monthly gains exceeded expectations, rising 1 percent compared with a forecast of half that.

Inflation weighs particularly hard on those at the lower end of the income scale. A much larger share of income goes into current consumption, so higher prices squeeze budgets more. Meager savings are much more likely to be in low-interest paying bank accounts than in equities or inflation hedged investments, so they are vulnerable to to the deterioration of the buying power of the U.S. dollar.

The details of March’s price hike make it even clearer that the early Biden era inflation is weighing particularly on the bottom end of the income scale. Gasoline prices, for example, rose 8.8 percent in March. The lower third of household incomes spend more on transportation than the upper two thirds, according to long-running data from Pew Charitable Trusts.  In 2019, transportation costs—of which the price of gasoline is a major component—accounted for 17 percent of all household expenditures, according to Statista, the second biggest category after housing.

Food is third in line after transportation and housing, accounting for 13 percent of household spending. The March Producer Price Index indicates food prices rose half a percentage point in March and 1.3 percent in February. Over the past 12-months, food prices are up 5 percent.

Contrast the shares of household spending with the top income brackets. The top third of households, measured by income, spend around 8 percent of income on transportation, according to Pew Charitable Trusts. Statista gives higher figures for the top quintiles but still a good deal below the bottom quintiles. The same goes for food—it takes up less of a wealthier family’s income and makes up less of its monthly expenditures.

What’s more, wealthier households are more likely to benefit from the “upside” of inflation because they have more fixed interest rate debt that gets to be paid back in depreciated dollars in an inflationary environment. By contrast, households with floating rate debt—such as credit cards—do not benefit because the rates tend to rise alongside inflation. Similarly, lower-income households are more likely to rent their homes than upper-income households, and rents rise with inflation.

Inflation also tends to be good for equities over the long term because companies can raise prices, which translates into higher earnings and higher stock prices. The top one-percent of income earners have 47.9 percent of their wealth in publicly traded stock and mutual funds, a far higher share than lower-income Americans. Particularly if wage gains drag behind prices and interest rates remain low, higher inflation can be very good for stocks, which is one reason we keep seeing new market highs.

Inflation, particularly food and gasoline price hikes, acts as a regressive tax, hurting low-income households more than higher-income households. In fact, higher income households are likely net beneficiaries of inflation.

Biden, who won office on a promise to combat inequality and only hike taxes on very wealthy Americans, has presided over a stealth inflation-tax hike over lower-income households. Inflation is fast becoming the hallmark of the Biden administration—Bidenflation, if you will.

Welcome to Biden’s America, where the poor pay more.