Who Inflation Hurts the Most

Whether rising prices are a problem depends on what type of consumer you are.

By SHARE

It ought to be a simple question to answer: Is inflation a problem or not?

It's anything but simple, however. Federal Reserve chairman Ben Bernanke says he's not terribly concerned about inflation, even hinting that he wouldn't mind a bit more of it. The Fed's job is to keep the economy healthy, which is why Bernanke et. al. focus on "core" inflation, which excludes energy and food. That might seem senseless to ordinary people who need gas and milk to survive, but focusing on core inflation lets the Fed focus on factors it has some control over, like whether wages are rising too fast, which could destabilize the economy. Energy and food prices tend to be driven by external factors like weather, overseas demand, and turmoil in the Middle East, which the Fed can't do much about.

[See why $4 gas need not wreck your budget.]

But ordinary people can't dismiss volatile price swings quite so easily, and many Americans rightly wonder how the Fed can be so blasé about inflation when the price of things they buy every day seems to be skyrocketing. Gas prices, for example, have risen by about 11 percent this year alone, and now stand at about $3.35 per gallon. With upheaval in the Middle East intensifying, they could easily approach the pivotal mark of $4 per gallon. Food prices have gone up, too, and healthcare and education always seem to get more expensive.

Inflation, it turns out, varies greatly depending on what kind of consumer you are. To isolate some of the differences, I used data from the Census Bureau and Bureau of Labor Statistics to list the things a typical household spends the most money on. Then I calculated the price increase for each category over the last year, to see which categories are going up in price by the most. Overall inflation over the last year, including all products and services, has been a tame 1.7 percent. Here's how costs for the other things we spend money on compare:

  Percentage of typical budget 1-year price rise
Rent or mortgage 20.2% 0.1%
Food 17% 1.8%
Utilities 7.2% 1.3%
Healthcare 5.9% 2.9%
Entertainment/recreation 5.6% -0.6%
Vehicle purchases 5.5% 0.4%
Motor fuel 5.4% 13.5%
Household energy 4% 1.3%
Clothing 3.6% 0%
Furnishings and appliances 3.2% -2.2%
Telephones and service 2.2% -1.2%
Education 2.1% 4.2%
Housekeeping supplies 1.3% 0%
Personal care 1.2% 0.7%
Public transportation 1.0% 7.7%
Alcohol 0.9% 2.3%
Tobacco 0.6% 5.2%

Looking over this list gives you a pretty good idea of who thinks inflation is high, and who thinks it's low. Anybody who needs to drive a lot spends more than average on gas, which has gone up in price by more than any other major category over the last year. Lower-income drivers are especially exposed, since they have less disposable income, with fewer things to give up to help pay for increased gas costs. Foregoing your car isn't much of an option either, since public transportation has gotten a lot more expensive, too. Transportation overall, in fact, is a budget-killer—which makes a short commute a valuable asset these days.

[See how to survive tax hikes and spending cuts.]

Families with kids in college are in a bind, too, thanks to education costs that are rising more than twice as fast as overall inflation. The cost of healthcare is also rising faster than inflation, which is like an added tax of millions of families who pay a portion of their own healthcare, including insurance premiums. Since few employers offer total coverage anymore, that impacts much of the middle class.

Food costs have gone up, too, as grocery chains and producers that have been absorbing cost increases have started passing them on to consumers. Overall, food is up just 1.8 percent, but some categories (which I didn't break out in the table above) are up by more. Meat, poultry, and fish, for instance, has gone up by 6.3 percent over the last year. And food inflation could intensify over the next few months if oil prices continue to rise, since producing and transporting food requires a lot of energy. "Businesses are reluctant to increase prices very fast," says economist Chris Christopher of forecasting firm IHS Global Insight. "Then all of a sudden they'll do it. We expect food prices to creep up even more."

[See why you might be better off than you think.]

As the price of staples like food and energy rise, people on low or fixed incomes tend to suffer the most, because there's not a lot they can give up to offset the rising cost of things they need to survive. That impacts a lot of retirees, one reason there was a minor uproar when the government announced last fall that there would be no cost-of-living increase for Social Security recipients this year. President Obama wants to make up for that with a $250 "economic security" payment to seniors, but a Congress eager to cut spending seems unlikely to go along.

Many other consumers feel little price pressure, however. If you don't have kids, you don't have to worry about the cost of education, which is a perennial budget-buster. Younger consumers need less healthcare, which is an economic blessing as well as a physical one. Young families buying and furnishing a home benefit from housing affordability that's the best it's been in decades. Many appliances are actually falling in price, especially those with microprocessors. The price of computers has fallen by nearly 7 percent in a single year, for example; the price of TVs is down a whopping 18 percent.

[See why baby boomers are bummed out.]

We don't always notice when prices fall, one reason we don't necessarily pocket the savings. Instead, we buy bigger, better, and cooler gizmos. The iPad 2, for instance, costs the same as its predecessor, but comes with more computing power and better features—so in terms of capability, it's cheaper. Still, people who spend a fair amount of their money on gadgets, entertainment, and restaurant meals are a lot less sensitive to inflation, since some of what they buy is getting cheaper, and fairly minor cutbacks on some things are often enough to cover higher prices for food and energy. To the iPad set, inflation truly is mild.

If there's a simple rule of thumb, it's that younger consumers and people with more disposable income are enjoying low inflation. For many families with kids, retirees, and low-income workers, inflation is higher. And buying an iPad, unfortunately, won't lower your personal inflation rate.

Twitter: @rickjnewman