[Announce] The Washington Post says "Inflation hits the Poor Hardest"

[Robert Waldrop]

Inflation Hits the Poor Hardest
No Income Group Is Untouched, but Staples Are 
Rising Fastest

By Neil Irwin and Alejandro Lazo
Washington Post Staff Writers
Friday, March 21, 2008; A01

Inflation is walloping Americans with low and 
moderate incomes as the
prices of staples have soared far faster than 
those of luxuries.

The goods and services Americans consumed in 
February were 4 percent
more expensive than they were a year earlier. But 
there is a big
divide in how much prices are climbing between the 
basic items people
need to live and get to work, and those on which 
they can easily cut
back when times are tight.

An analysis of government data by The Washington 
Post found that
prices have risen 9.2 percent since 2006 for the 
groceries, gasoline,
health care and other basics that a middle-income 
American family has
little choice but to consume. That would cost such 
a family, which
made $45,000 on average in 2006, an extra $972 per 
year, assuming it
did not buy less of such items because of higher 
prices. For a broad
range of goods on which it is easier to scrimp --  
such as restaurant
meals, alcoholic beverages, new cars, furniture, 
and clothing --
prices have risen 2.4 percent.

Wages for typical workers, meanwhile, have been 
rising slowly. In that
same time span, average earnings for a 
non-managerial worker rose
about 5 percent. This contradiction -- high 
inflation for staples, low
inflation for luxuries and in wages -- helps 
explain why American
workers felt squeezed even before the recent 
economic distress began.

"It just doesn't seem like anything is cheap these 
days," said Faith
Tyler, 41, a personal trainer from Baltimore who 
has reacted to the
higher prices for necessities by cutting back on 
luxuries. "I don't
eat out very much, no vacations, nothing 
extravagant unless it's on sale."

Inflation is not occurring because labor markets 
are tight or because
the U.S. economy has been overstimulated; if that 
were the case, wages
would be driving inflation up, leaving ordinary 
households in decent
shape and doing more damage to those who lent 
money at fixed interest
rates.

Instead, this inflation is driven by global 
commodity markets. China,
India and other developing countries' thirst for 
oil has been growing
faster than producers can quench it, sending the 
price of oil up about
60 percent since 2006. Prices for oil and other 
commodities fell
yesterday though they remain very expensive by any 
historical standard.

Expensive crude oil has translated into higher 
costs to heat a house
or drive to work. The average middle-income 
household must spend $378
more per year on gasoline than it did in 2006 if 
it consumes the same
amount, and an extra $38 on fuel oil.

The rapid growth of developing nations, combined 
with the increasing
use of land to produce ethanol, has led demand for 
food to outstrip
supply. That middle-income family is spending $253 
more each year on
groceries than it did two years ago, assuming it 
did not change its
buying patterns.

The price for dairy products has risen 15 percent 
since 2006; fruits
and vegetables are up 10 percent. Even routine 
cereals and bakery
products are up 8 percent. Tyler, the personal 
trainer, complained
that soy milk is more expensive: "Why is it going 
up from $3.49 to
$4.10 for a gallon? It comes from a bean, not a 
cow."

A deeply rooted set of problems in the system has 
caused health-care
costs to rise faster than those of most goods, 
costing that
middle-income family $204 more compared with 2006.

"This is what's at the core of the middle-class 
squeeze," said Jared
Bernstein, an economist at the Economic Policy 
Institute, a
left-leaning think tank. "The idea that you can 
understand the kind of
budget constraints that middle-class families face 
by looking at
overall inflation is wrong. You have to look at 
the core items a
middle-class family buys."

The rise in the basic cost of living means that 
inflation
disproportionately affects those with modest 
incomes. For example, in
2006, the top 20 percent of households by income 
spent about twice as
much on staples as households in the lower-middle 
bracket. But the
top-earning families had almost six times as much 
income.

In the Washington area, this has been hardest on 
families with modest
to low incomes whose members have to drive long 
distances to work.
However, incomes here are much higher than the 
national average, so
more families are in the top 20 percent of earners 
nationwide -- those
with more than $89,000 in income in 2006 -- and 
are better able to
handle the higher prices.

The pinch of inflation from energy, food and 
health care is a
significant factor in softening consumer spending, 
which in turn is
the reason economic growth is slowing sharply this 
year. It is not the
only reason consumers are pulling back, however. 
Lower home prices,
less credit availability and dropping stock market 
values are other
likely factors.

Those different sources of weakness are affecting 
different groups of
consumers. Poor and middle-income people are 
suffering the worst from
inflation, middle- to upper-middle-income families 
are bearing the
brunt of the softer real estate market, and the 
affluent are pinched
the most by problems in financial markets.

"There's really no segment of consumers that are 
escaping the slowdown
right now," said Scott Hoyt, director of consumer 
economics at Moody's
Economy.com.

The fact that inflation is being driven by 
commodities has made it
tricky for the Federal Reserve as it tries to 
prevent the downturn
from becoming a deep recession. The Fed's 
interest-rate cuts, for
example, have contributed to a decline in the 
value of the dollar,
which is one reason for higher prices. The central 
bank forecasts that
prices for fuel and food will level off this year, 
but that could
prove wrong. But in the Fed's view, there is not 
much it could have
done to prevent the run-up in prices for 
working-class Americans over
the past year, given the international origins of 
the inflation.

For now, the inflation in staples is forcing 
people to adjust.

"Everything is going up," said Ren¿ Chavez, 72, 
of Wheaton, speaking
Spanish and sitting in the food court at the 
Wheaton Mall. "I have a
car but now I take the bus, even if it is cold . . 
. my money now has
less value," he said. "I go into a store with $6 
and, imagine it, it
isn't worth anything."

"Everything has gone up, eggs, milk, everything is 
very high, and we
don't have a remedy," he said. "We have to eat."

http://www.washingtonpost.com/wp-dyn/content/article/2008/03/20/AR2008032003517_pf.html