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How Inflation Creates Economic Disparities

Inflation has returned, soaring to the highest level seen since 1981. Recently rose to 8.6% in May of 2022, and is likely to continue higher owing largely to the pandemic-induced supply shortages. With inflation posing a serious threat to the economy, the problem seems to be only getting worse as expectations have recently been de-anchored. Meaning consumer expectations have drifted away from the Fed Reserve’s forecasts, anticipating inflation to persist in the long run. When consumer inflation expectations deviate from that of the Fed, the effectiveness of monetary policies will become tapered. People will demand higher wages, causing an increase in cost, leading to the phenomenon known as wage-price spiral. Thus Fed credibility is of utmost importance in the success of inflationary control.

The cost of inflation can be experienced throughout the economy. No one individual is safe from its grasp. The decaying of purchasing power significantly increases the cost of capital, cost of borrowing, as well as everyday expenses. First hitting commodities raising the cost of gas, and now rippling to restaurants, grocery stores, and now services. Despite rising costs, the trade-offs of purchasing power decay outweigh that of cost growth. This leads to lower levels of saving which results in a lower level of physical capital over time. In the financial markets, excessive inflation also raises the cost of CAPEX, discouraging growth investments and often leading to recessionary periods.

Although inflation results in numerous costs to society, the damages however disproportionately affect the lower income. Lower-income individuals tend to spend a higher proportion of their income on necessities while having a smaller cushion of disposable income. Cost of necessities like meat, poultry, fish, eggs, etc have risen 14.2% over the last twelve months, rent 5.4%, and energy ~30%. The majority of these necessary goods have risen at rates over 8.6% in the past year, significantly larger than the CPI rate. On top of this, wages have only grown 50% of the rate of inflation thus resulting in major income erosion. The erosion of purchasing power from the cost of necessities poses a serious threat to the livelihoods of these families. And with inflation expected to continue, with the potential of continual rise, policies to alleviate these inflation-induced disparities must be imposed.

To protect the low income from the rising burdens, social welfare policies must be focusing on buoying the costs. However, to produce successful welfare plans without excess costs, studies must be conducted to understand the margin of the cost that disproportionately affects the poor. Identification of the problem is the necessary first step to understanding the right approaches to a sustainable solution. Targeting the known problems, low-income renter protection policies through a reduction in eviction could prevent the direct expulsion of people onto the streets. Similarly to address the significant growth in the cost of energy, subsidizing or reducing the local transportation fares could maintain pre-inflation levels of productivity. To enact an efficient policy, cost-analysis must be conducted in various locations to measure the effects of inflation on the public resources to understand the necessary levels of subsidy. Excess subsidization could inverse the effort to tame inflation. Apart from subsidiary welfare solutions, redesigning local zoning codes could allow for higher levels of housing construction which will directly tame inflation as well as rent prices allowing for lower overall costs.

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