How Inflation Hits the Poor and Middle Class the Hardest
The current cost of living crisis driven by high inflation is impacting British households across the income spectrum. However, it is the poor and middle class who are being disproportionately affected by the rising prices compared to the wealthy.
This is because lower income families spend a much larger proportion of their earnings on essential goods and services like food, energy bills, and transportation. These are the areas that have seen some of the highest price increases over the past year. With a limited amount of disposable income, poorer households are left with little room to cut back on non-essential spending to offset the impact of inflation.
In contrast, wealthier households spend a smaller percentage of their overall budget on essentials. While higher prices still hurt their wallets, the rich have more financial breathing room to adjust their spending on luxuries and non-necessities without impacting their basic standard of living.
Essentials Take Up Larger Budget Share for the Poor
According to the Office for National Statistics (ONS), the poorest 10% of UK households spend 54% of their total budget on essentials like food and energy. This compares to just 31% for the richest 10%. With less disposable income, poorer families are severely squeezed when the costs of basics rise rapidly.
Meanwhile, middle income households devote around 37% of their spending to essentials. So they also feel inflationary pressure more intensely than the affluent, though not to the same degree as the outright poor.
Wealthy Have More Room to Trim Fat from Budgets
Because they spend a smaller portion of their earnings on basics, the wealthy have an easier time weathering inflation storms. As prices rise, they can cut back on extravagances and non-vital expenditures without impacting their ability to afford necessities.
For example, an affluent family may decide to take fewer overseas holidays, buy less designer clothing, or scale back home renovation plans. While inconvenient, trimming these luxuries will not prevent them from putting food on the table or heating their home.
Poorer households do not have this flexibility. With every penny accounted for covering essential costs, any room left in their budgets quickly evaporates as inflation sends prices upward across the board.
Wealthy Have More Savings and Investments
In addition to more discretionary spending, wealthier households tend to have larger savings, investment portfolios, and other assets to help cushion against inflation. Lower income families often have little to no financial buffer against rising prices.
When you are living paycheck to paycheck with no rainy day fund, a sustained rise in the cost of living can be devastating. Meanwhile, the rich can dip into their reserves to maintain spending power until inflation eases.
Inflation Erodes Debt Burdens on the Wealthy
Ironically, one way inflation can actually benefit the wealthy is by eroding the real burden of their debts over time. This is especially true for fixed rate lending like mortgages.
As inflation pushes up wages and asset prices, the wealthy see their income and net worth rise. But the principal amount owed on their loans remains unchanged. So inflation steadily chips away at debt burdens in real terms.
Poor and middle income families tend to have less access to borrowing. And the debts they do have are often variable rate products like credit cards and auto loans that reprice higher along with inflation over time.
What Can Be Done to Help Less Affluent Households?
Clearly, lower income families are bearing the brunt of the inflationary surge. Unfortunately, there are no easy policy solutions to shelter them from rising prices driven by global factors like the pandemic and the Ukraine war.
However, the government can take some steps to help ease the pain, including:
- Increase benefits and tax credits to offset higher costs
- Impose windfall taxes on energy companies to fund financial aid
- Subsidize transportation and utility costs
- Control rents to make housing more affordable
While the wealthy may gripe about scaling back luxury spending, it pales in comparison to the intense financial pain being inflicted on poorer households by the cost of living crisis. Policymakers must act quickly and decisively to provide relief to those struggling the most.