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According to a Fed study, lower-income households are being hit the hardest by inflation as food and housing prices rise.

According to a Federal Reserve Bank of New York study, low-income households are being hit the hardest by inflation because rising food and housing costs account for a larger portion of their spending.

The finding represents a reversal of the pattern that existed when consumer prices first spiked in 2021 and early 2022, with the most severe impact falling on middle-income Americans.

Who is the most affected by inflation?
According to New York Fed blogs, from early 2021 to June 2022, Black, Hispanic, and middle-income households were the hardest hit by rising prices because more of their spending is devoted to transportation costs, which soared as the price of used cars and gasoline skyrocketed.

According to one blog, young and less educated people felt a similar impact because they, too, spent more on used cars and gas.

However, prices for both used cars and gasoline have fallen in the last five months. Meanwhile, food costs increased 10.4% year on year in December, while rent increased 8.3%. As a result, Black, young, less educated, and middle-income Americans now face a smaller inflation gap than the average household, according to the study.

What impact does inflation have on low-income families?
Instead, the bottom 40% of income households, as well as Asian Americans, face the highest annual inflation – by nearly 0.4 percentage point – because food and housing account for a larger portion of their spending. This reverses their earlier advantage during the current inflation episode.

According to the blogs, older and college-educated consumers are also feeling the effects of higher inflation because they spend more on food and housing.

However, lower-income groups are the most hampered because they are less able to substitute less expensive goods for pricey items and have fewer cash reserves, according to New York Fed blogs.

The top 20% of households have incomes that fall roughly in the middle of the three income groups. Rising transportation costs impacted them more than lower-income people, but not as much as middle-income households. They also spend slightly less on food than the other two groups, less than lower-income groups, but roughly the same as middle-income groups on housing.

What is the inflation rate in the United States?

According to another NY Fed blog, rural areas have also felt the ups and downs of price changes over the last two years. Because of the increase in transportation costs, rural inflation was higher than urban inflation in 2021 and early 2022, but it is now back below the national average.

Overall annual inflation fell to 6.5% in December, down from 7.1% in November and a 40-year high of 9.1% in June.

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