How inflation taxes the poor


A condemned house on a side street in Burnley, UK


Photo:

Anthony Devlin/Bloomberg News

The UK reported its highest inflation rate since 1982 on Wednesday, and welcome the 40 Year Club alongside the US A new generation on both sides of the Atlantic is learning how erratic price swings can destroy an economy. And with that in mind, a brief research note from a London think tank deserves a closer look.

Britain’s official consumer price inflation rate released this week is 9% in April, but not everyone is suffering equally. For the first time in this inflationary cycle, the poorest British households are experiencing the largest price increases, according to calculations by the Institute for Fiscal Studies. The 30% of households with the lowest incomes saw the prices they pay increase by at least 9.7%, and up to 10.9%. The top 10% earners saw their prices increase by “only” 7.9%.

The reason is that people at different income levels spend different proportions of their income on different goods and services. Such a “consumption basket” is an integral, although little discussed, part of the calculation of the inflation rate. UK inflation is being driven by soaring energy costs, with household electricity and natural gas bills rising 54% in April. Since energy accounts for a larger share of a low-income household’s budget (11% of total expenditure, compared to 4% for the highest incomes), low-income Britons feel the effects of inflation more keenly. energy price.

That inflation acts as a highly regressive tax on low wages is well known to economists. But the misery currently experienced by low-income Britons is not an abstraction. And it becomes a political handicap for Prime Minister Boris Johnson, whose climate fixations have done so much to drive up energy prices. Don’t be surprised if President Biden and America’s Democrats are the next to get a political education in this economic reality.

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

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