Inflation reallocates purchasing power to a minority of Americans who drive spending.
Michael Brendan Dougherty writes that many Americans are reasonably upset with the economy mostly because of higher prices and a diminished path to upward mobility, even though the aggregates are trending in the right direction. I agree, and have written as much. One interesting wrinkle, though, is how households can feel as if they’re falling behind when they’re spending more on consumption than ever before, even when adjusted for inflation.
How can people’s living standards be getting worse while they’re buying more stuff? The answer, I believe, is that American consumers are not a monolith. Different groups of people have seen their consumption change at very different rates over the past several years.
Last year, the Wall Street Journal noted that the top 10 percent of earners now accounted for half of all consumer spending — a record high. By the same token, lower- and middle-income earners’ share of total spending had fallen since the pandemic. Theoretically, this development could have occurred as everyone’s real spending rose, but high-earners’ spending grew by more. That is what happened in the 1990s, and few people complained about it.
But such broad advancement isn’t what happened this time, the Journal reports:
Taken together, well-off people have increased their spending far beyond inflation, while everyone else hasn’t. The bottom 80% of earners spent 25% more than they did four years earlier, barely outpacing price increases of 21% over that period. The top 10% spent 58% more.
By those figures, the bottom four-fifths of earners saw their real consumption (adjusted for inflation) rise by only 4 percent in four years. The highest tenth of earners, meanwhile, saw their real consumption shoot up by 37 percent in that time. And extra spending for top earners mostly doesn’t go to basic needs like food or gasoline but to visible “wants” and luxuries that others can’t afford. (Think sporting events, amusement parks, and concerts.)
No wonder the good news in economic headlines feels uneven — it has been uneven. The headline of record consumer spending conceals who’s doing the spending.
As the Journal details, much of the rise in high-end living standards has come from surging stock markets and home prices since the pandemic. A small percentage of Americans became very liquid very quickly. I would ascribe much of that asset appreciation not to real productivity or value gains but to the inflation unleashed by a flood of new money in 2020 and 2021. There’s nothing about a general rise in prices that exempts houses or stocks.
Indeed, inflation is little more than the hidden transfer of purchasing power from individuals who don’t hold nonmonetary assets, such as equity and real estate, to individuals who do. Inflating the currency doesn’t destroy purchasing power; it just reallocates that power to holders of new money. Since the supply of goods and services is unaffected by the growth of money, prices are bid up for the market to clear, and those able to bid the highest get what they want to buy. Some people come out ahead at the expense of everyone else.
Maybe that’s part of the reason Americans aren’t happy. The amount of money someone has available to buy things is supposed to reflect their contribution to overall supply, so people take out of the economy only as much as they put in. Inflation cheats this social bargain, and those on the receiving end can feel it.