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'Inflation is a tax on the poor' is a meme often used to justify policies which hurt the poor. Is inflation really the cruelest tax?

Most often it is conservatives and libertarians who invoke the possibility of hyperinflation to justify austerity measures and cutting government spending on programs that benefit the poor and the middle class. Since conservatives in particular seem less concerned with the possibility of hyperinflation when trillions of dollars are pumped into backdoor bailouts of the banks or wasted on foreign military adventures or subsidies for Big Agriculture and Big Oil, I'm a bit suspicious when they claim to be protecting the poor from future inflation by cutting government services and transfer payments.

So what's the evidence? Does inflation hurt the poor the most? Find out underneath the mating snails.

Historical data on inflation is available from many sources. I grabbed data from the Federal Reserve on annual average CPI from 1913 through 2010 (1982-1984=100).

Data from the Census Bureau on the Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Households can be found here.

The correlation coefficients between CPI and share of aggregate income of households, from the beginning of the series in 1967 to 2009, are as follows:

Poorest 20%       0.707

Lower middle       0.582

Middle                0.601

Upper middle       0.660

Richest 20%     (-0.635)

For the poorest quintile the correlation of income share with inflation over the period 1967 to 2009 was strongly positive. That is, periods of high inflation, such as the 1970's, coincided with periods of a stable or slightly growing share of national income for the poorest 20%. Conversely, during the long period of low inflation starting in the early 80's, the share of total income of the poorest 20% persistently declined. The same is true for the middle three quintiles, which also had strongly positive correlations. Only for the top quintile, the top 20% of households, was the correlation between inflation and income share strongly negative (-0.635). For the richest households periods of high inflation corresponded to periods of declining income share, and periods of low inflation corresponded to periods of growing income share.

All of these results are statistically significant (p<.001). There is less than one chance in a thousand that comparison of sets of unrelated variables would, by chance, show as much of a relationship.

The Census Bureau also has data on the share of income by quintile of families, instead of households, and that data goes back to 1947. Over that longer period a similar pattern, though less pronounced, still holds. Comparison of income share of families with the CPI data for the period 1947 to 2009 yields the following correlations:

Poorest 20%       0.486

Lower middle       0.162

Middle                0.199

Upper middle       0.294

Richest 20%     (-0.272)

Again it was the poorest 20% whose share of aggregate income was most closely correlated with inflation, and again the income share of the richest 20% was negatively correlated with inflation.

The correlations for families for the lower middle and middle quintiles are too small to meet the test for statistical significance, and the significance of the results for the upper middle and top quintiles is modest (p<0.05, or less than one chance in twenty that the correlation is the result of chance). But, as with the household data, the positive correlation between inflation and the income share of the poorest 20% is highly statistically significant (p<0.001).

Based on these data sets from the Fed and the Census Bureau I'm inclined to conclude that inflation hurts the rich and helps the rest.

This conclusion is supported by analysis of historical data on the income share of the top decile in other countries. I found a link to such data here. For the years (as noted) where I had continuous data for both, I calculated correlations between CPI data (sourced as noted) and income share of the top 10% for a few countries as follows:

Australia       -0.414          (p<0.01)           1949-2003     CPI data here    

Canada        -0.331          (p<0.01)            1941-2000     CPI data here

France         -0.294          (p<0.1)             1956-1998     CPI data here

Germany       -0.170          (n/a)                1961-1998     CPI data here

Japan           -0.051          (n/a)                1956-2002     CPI data here

Spain           -0.414          (p<0.01)            1957-2002     CPI data here

UK               -0.506          (p<0.001)          1961-1998     CPI data here

US               -0.362          (p<0.001)          1917-2004     CPI data here

The results for Japan and Germany are not statistically significant, and the significance of the other results varies as shown. I note that all of the correlations of the income share of the top 10% in the countries tested are negative. Since the correlation for income share of the bottom 90% is necessarily of equal magnitude and opposite sign as the correlation for the top decile, these results seem to indicate that inflation tends to increase the income share of the bottom 90% at the expense of the richest 10%.

I have no training in economics or statistics, so all of the above analysis may be wrong. I may have made bad choices about what data sets to compare, failed to control for different base years in inflation data, or misinterpreted the implications of the correlations. I'm on particularly shaky ground when making bold assertions about statistical significance. If I have gone astray in my choice or interpretation of data, or otherwise miscalculated, I hope someone will set me straight in the comments.

But if I'm not wrong then I contend that those who have propagated the dubious meme that inflation hurts the poor the most (I'm talking to you, Ron Paul) should be challenged to explain why historical data seem to indicate that the meme is just flat wrong.

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Comment Preferences

  •  Tip Jar (6+ / 0-)

    " 'In this world, Elwood, you must be oh so smart or oh so pleasant.' Well, for years I was smart. I recommend pleasant. You may quote me." Elwood P. Dowd

    by paulbkk on Mon Aug 15, 2011 at 08:28:12 AM PDT

  •  If memory serves, (1+ / 0-)
    Recommended by:

    the 1970's were also a time of intense UFO activity:

    That is, periods of high inflation, such as the 1970's, coincided with periods of a stable or slightly growing share of national income for the poorest 20%.

    The point being, just because something coincides with something else, that hardly means their is a causative relationship between the two things. . . .

    Also, I wonder how the SS recipients who are currently receiving 70% less in benefits than they would be if inflation had been tabulated correctly since the Carter Administration feel about all this . . .

    •  What programs were voted in (1+ / 0-)
      Recommended by:
      Roadbed Guy

      and implemented starting in the late 60's through the 70's, and what affect did they have on payments to those most likely to be poor, ie, the elderly and minorities.

      Statistics lie.  Correlation is not causation and all that.

      I believe in UFO's more than the fact that poor people do better with inflation.  Because historically minimum wage rises faster than inflation, right??

      •  Who doesn't believe in UFOs more? (1+ / 0-)
        Recommended by:

        (and I don't care what the "more than what?" qualifier is . . .).

        In any event, the very idea of the rich being "hurt" by financial trends (or any type!) in recent years is just fall down hilarious.

        Perhaps this diary was some high level of snark that just passed over my head on the first read through.  Who knows.

      •  Historically (0+ / 0-)

        all wages rise with inflation. And that makes sense because inflation tends to be led by full employment and high capacity utilization. Before the Friedman/Greenspan gang simplified economics to the point of boneheaded stupidity, we had analytical tools called "Cost Push" and "wage price spirals" which have been replaced with the, obviously wrong, monetary theory.

        "If I pay a man enough money to buy my car, he'll buy my car." Henry Ford

        by johnmorris on Mon Aug 15, 2011 at 09:36:07 AM PDT

        [ Parent ]

        •  did you even examine (0+ / 0-)

          the link and the reality of the minimum wage and inflation, and what really happens to the lowest wage earners in America over periods of high inflation??

          •  Yes I did (1+ / 0-)
            Recommended by:

            and you might have noticed that the minimum wage was relatively high in the late 60's, when inflation was above 5%, peaking in 1968, the start of the high inflation 70's and took a dive after 1983, when inflation flat  lined.

            "If I pay a man enough money to buy my car, he'll buy my car." Henry Ford

            by johnmorris on Tue Aug 16, 2011 at 07:06:03 AM PDT

            [ Parent ]

  •  Inflation hurts the poor more (4+ / 0-)

    Not because of percentages, but because there is no cushion for them.  The choices get harder really quickly.

    Have you ever gone beyond theory to examine the reality of low income living?

  •  Here's an easy way to say it (7+ / 0-)

    I think your analysis is good, and shows the statistical reason for the pressure to keep inflation low, but think about it this way; The more money you have, the more inflation affects it.  Rich people are more concerned about inflation because it means their money is worth less.  God forbid!  They stole that money honestly!

    Here is the real kicker to go along with your analysis though.  Economist know there is a relationship between inflation and unemployment, it's called the Phillips Curve.  The Phillips Curve shows a negative relationship between inflation and employment.

    Basically, the government and the Fed can make choices between high unemployment and high inflation.  I think you can guess which the corporations and the rich want.  The added benefit for the rich and the corporations is that by using monetary and fiscal policy to keep inflation low, they cause higher unemployment, which has the added benefit of lowering wages.

  •  Of course (3+ / 0-)

    Inflation hurts those with money and HELPS those who borrow.  The poor generally borrow money, but don't do a whole lot of lending.  Given the amount of debt I'm sitting on, I'd love a little inflation.  

    "How did you go bankrupt?" "Two ways. Gradually, then suddenly." - Ernest Hemingway, The Sun Also Rises.

    by weasel on Mon Aug 15, 2011 at 08:48:23 AM PDT

  •  Only if the poor have full equity in their homes (1+ / 0-)
    Recommended by:

    And there are a lot of poor people in the US who purchased and have paid off mortgages or who inherited a house and property.  Especially in rural areas.

    But the poor who rent are worse off in inflation because rents rise in anticipation of the next round of inflation.  Food prices rise.  Transportation prices rise.  But wages and salaries (or what safety net payments remain) don't rise.

    Inflation benefits only the highly leveraged.  And that tends to be corporations and aspiring middle class individuals.

    But try as they might the monetary gurus cannot create inflation in this economy even with interest rates functionally zero.  There is such an excess in capacity and idle productive resources.

    50 states, 210 media market, 435 Congressional Districts, 3080 counties, 192,480 precincts

    by TarheelDem on Mon Aug 15, 2011 at 08:51:18 AM PDT

  •  Depends on Assets Held (0+ / 0-)

    Whether inflation helps or hurts a particular tranche in the demographic pile depends heavily on the forms in which they might hold those assets.  If one holds cash, bank accounts, or other fixed-income debt instruments (bonds, basically) then accelerated inflation will kill you.  If one holds income-producing assets (a business, corporate stocks) then more inflation doesn't hurt your asset value so much as threaten your revenue stream.  If one holds long-term fixed assets (real estate, most residential) the assets will likely track inflation with a time lag for inflation's diffusion into the general economy.  Price rises in rapidly replaced commodities (food, fuel, etc.) will hurt everyone, but those who spend a disproportionate share of their income on them will be hurt slightly more.  The folks who get killed in hyper-inflation are lower-middle and middle-class segment of society.  Those are the people who were devastated by the hyper-inflation which wracked Weimar Germany during the middle 1920s and who became the main supporters for the NSDAP.

    "Love the Truth, defend the Truth, speak the Truth, and hear the Truth" - Jan Hus, d.1415 CE

    by PrahaPartizan on Mon Aug 15, 2011 at 08:55:20 AM PDT

  •  I'm sure you didn't post this in jest, so I'll (3+ / 0-)
    Recommended by:
    AnnieR, wblynch, annetteboardman

    try to post a serious reply.  Poverty is hell on earth.  People who live in poverty live under constant pressures that are unimaginable to all, who are not poor.  Their life expectancy is much lower; their mental health suffers under the brutal effects of poverty.

    Poverty is caused by many factors, but one of the most predominant factors is structural and systemic failures in society that tend to increase the gulf in income inequality.

    Once these structural failures become very pronounced and entrenched, poverty spreads as more and more members of the middle class fall from their tenuous positions.

    Now, where you saying something about how inflation affects the rich more?

    •  I lived in Nepal for several years (1+ / 0-)
      Recommended by:

      at the end of the 90s, and worked for NGOs both there and in India. I've shared more than a few meals of rice and lentils with the poor, and I'm familiar with the devastation poverty causes.

      Of course I didn't post the diary as a joke. I'm saying that, as TeacherD notes above, the data "shows the statistical reason for the pressure to keep inflation low" and suggesting pushback against a false meme that is used to prop up the structural impediments you mention and to justify policies which favor the richest among us.

      " 'In this world, Elwood, you must be oh so smart or oh so pleasant.' Well, for years I was smart. I recommend pleasant. You may quote me." Elwood P. Dowd

      by paulbkk on Mon Aug 15, 2011 at 09:24:47 AM PDT

      [ Parent ]

  •  Food (2+ / 0-)
    Recommended by:
    AnnieR, wblynch

    The cost of food is soaring.  That is what the poor care about.  That is what affects the lives of poor families.

    I don't know what's happening with the price of yachts, but I'll bet it's not a problem for yacht-buyers.

    Sunday mornings are more beautiful without Meet the Press.

    by deben on Mon Aug 15, 2011 at 09:02:59 AM PDT

  •  where to start... (1+ / 0-)
    Recommended by:

    (1) Correlation does tell us the extent to which the two quantities vary together.  The slope of that line matters, though, and it matters more for the folks at the low end.  If CPI goes up 5%, but incomes go up 4%, guess what?  That's bad.  And it's more bad for folks at the low end of the income spectrum.  Which leads to

    (2) The problem is non linear.  A person making 20k/yr who receives a $500 gift is impacted much more by that event than is someone making 20 mill/yr.  For the Donald, the expenditure of his high priced calories may not make it worth it for him to burn them to pick up a benjamin on the street.

    (3) to emphasize, a loss of 5k/yr for someone making 200k/yr, while somewhat painful, is nothing compared to the loss for someone making 50k.

    (4) The sizes of these correlations are a little low to make strong claims of impact.  0.7 means half the variance in salary is "explained" by variance in CPI.  What about the other half of that variance?

    "Don't tell me what you believe. Tell me what you do and I'll tell you what you believe. "

    by bubbanomics on Mon Aug 15, 2011 at 09:29:51 AM PDT

    •  what evidence would convince you (0+ / 0-)

      that inflation does or does not hurt the poor more than others? Not theories. Not hypothetical examples. Evidence. Data. What would it take?

      " 'In this world, Elwood, you must be oh so smart or oh so pleasant.' Well, for years I was smart. I recommend pleasant. You may quote me." Elwood P. Dowd

      by paulbkk on Wed Aug 17, 2011 at 05:37:51 AM PDT

      [ Parent ]

  •  One of the things (1+ / 0-)
    Recommended by:

    that happened in the 60's that had an impact on incomes was called the War on Poverty. It was a series of liberal programs designed to reduce poverty. In the 4 years of LBJ's presidency, poverty declined by half. Nixon canceled the programs as quickly as he could. The surviving one, Head Start, is under the gun.

    "If I pay a man enough money to buy my car, he'll buy my car." Henry Ford

    by johnmorris on Mon Aug 15, 2011 at 09:41:06 AM PDT

  •  Good, the rich can then become poor by paying some (1+ / 0-)
    Recommended by:

    fucking taxes.

    One bitter fact is two bit hacks populate the third rate fourth estate who are truly the fifth columnists. So, how did Obama piss you off today ?
    Call the media when they Lie

    by amk for obama on Mon Aug 15, 2011 at 09:48:47 AM PDT

  •  Inflation = Wages (1+ / 0-)
    Recommended by:

    People don't understand what inflation really is.  It is the cost of labor (wages)

    Working people and borrowers do benefit with inflation as it means their income grow and their debt is reduced as a percentage of income.

    If I owe $200,000 on my house and over 10 years, my income doubles, it effectively means my debt was cut in half.

    If the United States owes $14 trillion dollars and through inflation that is (effectively) reduced to $7 trillion, we just paid off half our debt!

    Rich people hate inflation.

    Inflation devalues their money.  It also means they have to pay more for labor (and commodities and supplies are impacted by the labor to produce them as well).

    But, Inflation increases the buying power of the working class and even the poor.

    The BIG LIE is that inflation is BAD.  It is only bad for the rich.

  •  CPI is frequently manipulated to get "better" (0+ / 0-)

    numbers.  I wouldn't trust it.

    Inflation hurts most those with last access to the newly created currency.

    Lets walk through an example.

    I have a printing press.

    I start printing 1 billion dollars a day.

    Week 1 I do this the 7 billion I spend buys 7 billion "day one" dollars worth of material.
    Week 2  I print 7 billion more and it buys 7 billion "day one" dollars worth of material.  The same week those I did business with last week spend their new found 7 billion and it buys 7 billion "day one" dollars worth of material.

    Week 3  The exchange reveals a flood of cash in the area and prices start to rise because individuals are less price conscious.  Prices rise by 10%.  I print 7.7 billion dollars to compensate it buys 7 billion "day one" dollars of goods.  The businesses that I deal with last weak spend their 7 billion but it buys 6.3 billion dollars of goods.  The businesses that got week 1's money now pay their workers and they get 6.3 billion dollars. (all of their saved money is now buying 10% less than it was).

    Week 4 The glut of money is now very noticeable and prices rise 50% above day 1 money.  I print 14 billion dollars and I get 7 billion "day 1" dollars of goods.  The businesses that I deal with last week spend their 7.7 billion dollars but it only buys 3.65 billion "day 1" dollars of goods...(uh oh they pay 4 billion "day 1" dollars for the materials...they cannot resupply).  The businesses that got week 2's money now pay their workers and the workers can only buy 3.5 billion dollars of goods (their real income just dropped in half along with all their savings).

    The most hurt are the ones who involve their business mostly in cash and those who use the money last (after the inflation has been realized).  This is almost always the poor.

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