Leading Indicators

Inflation in Greater Philadelphia - Part 6: Inflation Inequality

This data brief is the sixth part of our series covering the localized impact of inflation on Greater Philadelphia. In part four of this series, we demonstrated that average wage growth in the region lagged inflation – that is, as the cost of everyday items increased, wages remained relatively stagnant. If this trend continues, it has obvious implications for the long-term affordability of Greater Philadelphia. To examine the impact of inflation on different income-levels, this Leading Indicator introduces the concept of inflation inequality.

What You Need to Know

Inflation inequality is the unequal impact of the rise in prices on lower-income populations since the prices of necessity goods tend to increase faster than luxury goods.
When compared to middle- and higher-income individuals, a larger proportion of lower-income individuals’ earnings is devoted to necessities like rent, groceries, household fuel and utilities, etc.
Conversely, higher-income individuals spend a larger proportion of earnings on more luxury goods like homeownership, furniture and appliances, motor vehicles, restaurants, and so forth.
Since early 2000, the average monthly inflation rate for Greater Philadelphia’s necessity goods has outpaced luxury goods by roughly 0.1 percent per month. While at first glance this might not seem substantial, the average CPI for necessity goods in the region in October 2021 was 22.4 percent greater than that for luxury goods.
This does not mean that average prices for necessity goods in Greater Philadelphia are higher than prices for luxury goods, but that necessity goods are seeing disproportionate increases in pricing when compared to luxury goods.
The COVID-19 pandemic exacerbated inflation inequality in Greater Philadelphia. For example, inflation for used cars in Greater Philadelphia grew at a monthly rate of 1.8 percent between 2017 and 2021, while inflation for new vehicles grew by just 1.0 percent.
By June 2021, the inflation rate for used cars in Greater Philadelphia was almost 30 percent greater than that for new vehicles.

A Difference in Goods

Broadly, inflation inequality is the unequal impact the rise in prices has on lower income populations. It stems from the difference in consumption patterns across income brackets and the types of goods offered to these groups [1]. Not all households have access to the same types of products or services. While some wealthier households may be close to multiple grocery stores, for example, lower-income households may be in food deserts. Higher prices may also prevent lower-income consumers from purchasing certain goods, like new cars, organic foods, or designer clothing. Acknowledging these differences, researchers have separated components of the Consumer Price Index (CPI) into “luxury” and “necessity” goods based on consumption patterns of individuals at different income levels. Using the Consumer Expenditure Survey, luxury goods are defined as items that are consumed in greater proportion as an individual’s income increases [2]. Figure 1 categorizes luxury and necessity goods that can be measured across our region.

FIGURE 1

SOURCE: LaVaughn M. Henry’s Income Inequality and Income-Class Consumption Patterns methodology and the Consumer Price Index for all Urban Consumers (CPI-U) within the Philadelphia-Camden-Wilmington, PA-NJ-DE-MD MSA.

Luxury items include food away from home (food eaten at a restaurant), private homes, household furnishings and operations (appliances, furniture, lawn care, etc.), private transportation (privately owned cars or trucks), and recreation (pets and pet supplies, electronics, admission to concerts or sporting events, etc.). Necessity items include food to be consumed at home, rent, household fuel and utilities, healthcare, and education and communication (school tuition, mobile phones, etc.).

Not all goods can be compared at the metropolitan level, since sample sizes may be too small. For example, items like public transportation could not be categorized since its individual CPI is not computed for the region. Some categories include a combination of luxury and necessity items; while those that contain an equal distribution of luxury and necessity goods, such as apparel, were excluded from the analysis; others like education and communication—a largely necessity category that includes some luxury components like college tuition—were labeled based on the majority of components. Finally, it is important to note that individuals across income brackets consume both luxury and necessity goods. Inflation inequality highlights how the burden of price changes among these different types of goods disproportionately falls on different income brackets.

The Cost Burden

Figure 2 further outlines this burden of cost by showing the average share of total real consumption among the previously outlined luxury and necessity goods.

FIGURE 2

SOURCE: Average Share of Total Real Consumption, 1984-2012 estimates from LaVaughn M. Henry’s Income Inequality and Income-Class Consumption Patterns methodology and the Consumer Price Index for all Urban Consumers (CPI-U) within the Philadelphia-Camden-Wilmington, PA-NJ-DE-MD MSA.

NOTE: Categories were grouped based on items in the Consumer Price Index for all Urban Consumers (CPI-U) within the Philadelphia-Camden-Wilmington, PA-NJ-DE-MD MSA. Averages were taken for lowest and highest quintiles for easier interpretation.

Using the Consumer Expenditure Survey, researchers have calculated the relative share of an individual’s earnings devoted towards certain goods and services [2]. As shown in figure 2, a large proportion of low-income individuals’ earnings goes towards rent, food at home, household fuel and utilities, healthcare, and education – higher than those in middle- or high-income brackets. Individuals in higher income brackets spend a greater proportion of their earnings on homeownership, as well as slightly more on food away from home, private transportation, recreation, and household furnishing and operations when compared to low- and middle-income populations. Thus, with a differentiation in consumption patterns, it is important to see how inflation impacts the average price of these goods.

The Unequal Rise in Cost

A core finding, with respect to inflation inequality, is that the price of necessity goods has been growing at a faster pace than luxury goods. This is an outcome of supply and demand: with more disposable income at higher-income levels, creation and competition for luxury goods and services is more profitable than innovation and competition for necessity goods [3]. Economist Xavier Jaravel uses beer to illustrate this point [3]. In the past few decades, there has been greater innovation and competition in craft brewing of unique higher-end beers that has kept the relative cost of what would be an expensive beverage down. There is less competition and innovation among standard brands that are often sold in 30-packs. While the higher-end IPAs cost more than the 30-pack beer brands, inflation inequality means that the growth in price of mass-produced 30-pack beer brands has remained consistent while market competition and demand have kept fancier beer prices lower than they would be without competition.

Figure 3 demonstrates that market competition and innovation keep the average inflation of luxury goods down in Greater Philadelphia when compared with the average inflation of necessity goods. Indexed from February 2000, the average monthly inflation rate for Greater Philadelphia’s necessity goods has outpaced luxury goods by roughly 0.1 percent per month. While at first glance this might not seem substantial, the average CPI for necessity goods in the region in October 2021 was 22.4 percent greater than that for luxury goods.

FIGURE 3

The COVID-19 pandemic served to exacerbate inflation inequality in our region. Pricing surges for necessity goods, where there are fewer competing products, outstripped surges for more diverse luxury goods [4]. The new and used car markets provide an illustrative example.

Figure 4 shows the indexed inflation for Greater Philadelphia’s new and used vehicles since December 2017. With economic lockdowns and constricted supply chains, the manufacturing and distribution of new vehicles decreased. This in turn prevented higher-income customers from purchasing new vehicles—as they normally would—and forced them to retain their older vehicles rather than sell them to the used car market; it also pushed many would-be new vehicle buyers to consider purchasing a used vehicle [5]. The decreased supply of used cars trickling down from the new car market pushed the pricing up far higher for middle- and lower-income consumers, who normally could only afford a used vehicle. This is not to say that buying a new car was cheaper than buying used; rather, the strain on what would normally be a diverse and competitive new vehicle market exacerbated the more limited supply of used cars. The price for both types of vehicles increased because of supply chain constraints, but the price of used vehicles—a product that is geared more towards middle- and lower-income brackets—surged faster than that of new vehicles (as seen in figure 4). Thus, from 2017 to 2021, inflation for used vehicles in Greater Philadelphia grew at a monthly rate of 1.8 percent while inflation for new vehicles grew by only 1.0 percent. By June 2021 inflation for used cars in Greater Philadelphia was almost 30 percent greater than that for new vehicles.

FIGURE 4

SOURCE: The Consumer Price Index for all Urban Consumers (CPI-U) within the Philadelphia-Camden-Wilmington, PA-NJ-DE-MD MSA for New Vehicles and Used Cars & Trucks.

The Implication

Throughout this series we have both explained and contextualized inflation in Greater Philadelphia while also shedding light on the disproportionate impact it can have on lower-income populations. With the concept of inflation inequality, we see how simple price surges can exacerbate our region’s existing inequalities. The findings across our series on localized inflation demonstrate that Greater Philadelphia’s resiliency comes from being more affordable than many of its peer metropolitan regions. Doubling down on this regional asset and finding ways to increase affordability for those most in need may make our region more economically inclusive and competitive.

Read More About this Subject:

Inflation in Greater Philadelphia – Part 1: De-Mystifying Local Inflation

Inflation in Greater Philadelphia – Part 2: Comparing Metropolitan Inflation

Inflation in Greater Philadelphia – Part 3: Looking in the CPI’s Basket of Goods

Inflation in Greater Philadelphia – Part 4: Wage Growth and Inflation

Inflation in Greater Philadelphia – Part 5: The October 2021 Update

Works Cited

[1] Maye, Adewale. 2019. “How Inflation Reinforces Economic Disparities.” The Center for Law and Social Policy, 7 November. Retrieved from: https://www.clasp.org/blog/how-inflation-reinforces-economic-disparities.

[2] Henry, LaVaughn M. 2014. “Income Inequality and Income-Class Consumption Patterns.” Economic Commentary, 2014-18. Retrieved from: (https://www.clevelandfed.org/newsroom-and-events/publications/economic-commentary/2014-economic-commentaries/ec-201418-income-inequality-and-income-class-consumption-patterns.aspx).

[3] Lowrey, Annie. 2019. “The Inflation Gap.” The Atlantic, 5 November. Retrieved from: (https://www.theatlantic.com/ideas/archive/2019/11/income-inequality-getting-worse/601414/).

[4] Jaravel, Xavier. 2021. “Inflation Inequality: Measurement, Causes, and Policy Implications.” Annual Review of Economics, (13:1): 599-629. Retrieved from: (https://www.annualreviews.org/doi/full/10.1146/annurev-economics-091520-082042#_i52).

[5] Levin, Tim. 2021. “Why used cars are so expensive now — and when prices may drop.” Business Insider, 12 July. Retrieved from: (https://www.businessinsider.com/why-are-used-cars-so-expensive-now-shortages-pandemic-rentals-2021-7)