Federal Reserve Governor Lael Brainard: Inflation hits poorest families hardest

Low-income households are disproportionately burdened by high inflation — particularly rising food, housing and energy costs — but policymakers lack proper data to fully capture the disparity, according to remarks from the a senior Federal Reserve official.

“We benefit tremendously from understanding the industry, regional and demographic differences in how different Americans experience the economy,” Fed Governor Lael Brainard said Tuesday.

the speech offers new insight into how the Fed is pricing the economy and those on the fringes, especially as the Fed attempts to cut inflation without spelling out the consequences for the recovery. Brainard’s remarks also mark a change from those of Federal Reserve Chairman Jerome H. Powell at the end Januarywhen he said he was “unaware, you know, that inflation is literally falling more on, on different socio-economic groups”, but “some people are really prone to suffer more”.

‘Survival mode’: Inflation hits low-income Americans the hardest

Policymakers say their policies must ensure stable prices and a healthy job market for all Americans. Yet over the past few months, Fed officials have clarified how high prices are hurting the economy and how urgent it is for them to get inflation under control. This contrasts with earlier phases of the pandemic, when authorities prioritized healing the labor market, even if that meant tolerating rising inflation.

“We’ve all seen charts that show if you’re a middle-income person you have room to absorb some of the inflation,” Powell said in March. “If you’re at the bottom of the income scale, it’s very difficult because you’re already spending most of your money on necessities, and the price goes up.”

In his Tuesday speech, hosted by the Minneapolis Fed, Brainard also noted that while statistical data can give inflation or labor market numbers, it often doesn’t go far enough. Low-income households spend 77% of their income on necessities, more than double the 31% of income spent by high-income households on those categories, she said. Yet policymakers are “only beginning to understand” how inflation is experienced by different households, how that information relates to income and demographics, and whether people’s experiences change over time.

Brainard said it would be helpful to have a breakdown of inflation by demographic groups, similar to what is available for labor market and personal income data. But statistical agencies do not collect information that captures the household level, and that would require major changes in the way agencies do their work.

“Aggregate statistics – they’re critically important to us, but they don’t really tell a very complete story about how individual communities experience both employment and inflation,” Brainard said.

The Fed has a crucial job of slowing the economy, with seven interest rate hikes scheduled for this year. But is in a rush to do so without people losing their jobs or triggering a recession. The Fed’s plan has been hampered by even more uncertainty, since Russia invaded Ukraine and coronavirus outbreaks prompted further shutdowns in China. These forces are disrupting global energy markets, exacerbating supply chain backlogs and promising to push prices even higher.

The fact that the poorest households are more affected by inflation does not change the Fed’s policy trajectory. But it underscores the limits of the Fed’s toolkit, which cannot target specific pockets of the economy or parts of the population.

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Asked in January whether he was worried the Fed was underestimating or unable to effectively measure the effects of inflation on the most vulnerable households, Powell said inflation was hitting income earners hard. fixed or those who live from salary to salary.

“For economically well-off people, inflation is not good,” Powell said. “It’s bad. High inflation is bad, but they’ll still be able to eat and keep their house and drive their car and things like that. … That’s really what I think.

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A Washington Post analysis in February found that among the 10 categories with the highest levels of pandemic inflation, low-income people spent a greater share of their total spending on most of them, natural gas with beef. The highest earners spent more than the lowest on cars and furniture.

Along with their disposable income, high-income households also spend more of their budget on retirement accounts, mortgages and investments. If the costs of basic necessities increase, they have more room in their budget to absorb the prices or change their consumption habits, even within the same category of goods.

Brainard gave the example of breakfast cereals, when branded and store-branded versions go up in price. A wealthier family could save money by dropping the branded option. But a low-income household may have already purchased the cheaper version and must now decide whether to swallow the higher cost or simply buy less.

Andrew Van Dam contributed to this report.

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