Analysis of impacts of inflation on the distribution of household consumption expenditures

Abstract

AbstractAs a consequence of the COVID‐19 pandemic of early 2020, production in the United States, as in much of the world, largely came to a standstill. Unemployment in the United States quickly rose from 3.5% in February to 13.2% in May, quarter‐to‐quarter GDP fell 7.8%, and substantial transfers were enacted to maintain household income. The resulting mismatch between aggregate supply and demand not surprisingly ignited an inflation that by early 2022 had reached a year‐over‐year 40‐year high. The purpose of the present communication is to utilize a framework developed from data embodied in surveys of households’ consumer expenditures to analyze impacts of this inflation on separate categories of expenditure. The engine for the analysis, whose construction is described in detail by Taylor (2013, is a matrix of “intra‐budget” coefficients that represent the direct relationships amongst different categories of expenditure in households’ budgets. The elements of this matrix are constructed from the information in 58 quarters of data (2006 through 2019) from the ongoing BLS Survey of Consumer Expenditure to analyze effects and impacts on 16 categories of US household consumption expenditure of the 2021–2022 inflation. Principal findings include: expenditures for housing, transportation, gasoline and oil, and personal insurance consistently endure the largest impacts from inflation; real‐ income effects from inflation differ from those arising from a like cut in nominal income; not surprisingly, food expenditures are most impacted at low income.