Fed official notes income-based gaps
Caviar and canned tuna are grouped into the same category for the purposes of measuring the inflation rate in the U.S., and Lael Brainard, a governor of the Federal Reserve, thinks that is obscuring the nation’s ability to understand the different price-related challenges facing households.
Brainard, President Joe Biden’s nominee to be the Fed’s next vice chair, gave a speech Tuesday about the gaps in inflation across income groups — remarks in which she also emphasized the urgent need to bring price gains under control and the Fed’s dedication to that effort.
Low-income households spend 77% of their incomes on necessities, compared with 31% for higher-income households, she pointed out. Those differences may make it harder for poorer families to dodge rising prices, but it is hard to gauge exactly how much more intensely inflation hits low earners.
That’s because of the way it is measured: Inflation indexes give products weight based on how much people across the economy spend on them, so luxury products that only rich people buy are counted alongside the basic food, energy, clothing and other daily needs that lower-income Americans devote their paychecks to acquiring.
“Households with different levels of income may purchase significantly different items even within the same elementary index categories for goods and services,” Brainard said, noting the example of caviar and canned tuna.
That could be a problem: Tuna may go up sharply in price amid a fish shortage that increases costs of production, for instance, whereas caviar, as a luxury good, may have higher profit margins to begin with and increase less. Or there may be more substitutes for caviar.
Brainard also used the example of brand-name cereal to show how price increases can have different effects on different income groups.
“A household that had been purchasing brandname cereal could save money by purchasing store-brand cereal instead, perhaps even eliminating any effect of the price increase on their actual spending while purchasing the same quantity of cereal,” she said. But for the store-brand buyer, going down the price chain is not possible.
Aside from emphasizing the importance of continued research on the ways inflation affects households at different income levels, Brainard underlined reasons to worry that a rapid pace of price increases could persist. The Fed began raising interest rates to cool off demand and try to temper inflation last month and has forecast a series of upcoming increases, potentially including large ones in May and June.
Brainard pointed to Russia’s invasion of Ukraine, Covid-19-related shutdowns in China and continued strong demand for durable goods as risks that could keep inflation high.
“Currently, inflation is much too high and is subject to upside risks,” she said. “The committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted.”
She emphasized that markets expect that the Fed will act “expeditiously” to bring down inflation.
“It is of paramount importance to get inflation down,” she said, explaining that she expects the Fed to “bring the stance of policy to a more neutral position later this year.”