Studies Find Lower Inflation Rate For High Incomes, With Implications For Public Policy

There is a fascinating story over on EquitableGrowth about two new studies that show another negative side-effect of massive income inequality. The reports show that the basket of goods that high income earners purchase is substantially different from those of low income earners. But the really shocking finding is that the inflation rate on those high income goods is 0.65% lower than the goods that lower income earners purchase. A difference in inflation that great is astounding and has broad implications for public policy.

Two studies, one by the National Bureau of Economic Research and the other from Stanford University, support this finding. In essence, the driver of these two inflation rates is that higher income people buy higher quality goods from large brand name firms. Because of their economies of scale, these large brand name firms can innovate their products more cheaply than the smaller firms whose products are more generally bought by lower income earners. This results in lower comparative prices. In addition, global trade again favors the large firms and again allows them to offer these high end products more cheaply.

If these studies are true, then income inequality is in a (un)virtuous circle. The higher inflation rate for lower earners exacerbates income inequality which then makes large firms focus on even more innovative, cheaper products for higher earners feeding a further lower inflation rate for high earners and on and on. This process is exacerbated by the expansion in global trade, which again favors the larger firms over smaller ones. In addition, if the higher inflation rate for lower earners actually exceeds the inflation benchmark Consumer Price Index, then lower income earners are falling even farther behind as are the beneficiaries of social programs keyed to that benchmark.

It is yet another example of how the economic policies of the last 30 years have essentially created a two-tier economy. And the gap between those tiers is getting wider and wider. And it will only get worse under the Trump administration.