West DSM News

There is some authenticity to the phrase "the rich don't work for their money, their money works for them," as it relates to inflation, as low-income households are increasingly likely to struggle over the escalating costs of basic necessities compared to their middle and upper-class counterparts. 

Inflation disproportionally affects Americans with the lowest wages because they spend a higher percentage of their income on basic necessities like groceries, transportation and energy, according to a June 20 Wall Street Journal opinion piece.

“Those with higher incomes often offset price increases (goods, services) with increased income. Furthermore, prices often increase more for basic needs than for luxury items, a phenomenon economists call 'inflation inequality,'" according to the article.

Prices of groceries, gas and housing are among the necessities that have steeply inclined in cost over the past few months, the Telegraph Herald reported.

In layman's terms: "low-income families’ budgets will stress and strain as they confront the rising costs of the essentials they need," according to the Wall Street Journal opinion piece.

Robert Castle, a systems architect and a Quora respondent explained the logic behind the "money works for the rich" proverb, by hypothetically differentiating how money works for a "Poor Man" versus a "What-To-Do Man" versus a "Rich Man":

"Poor Man: Works all day and spends his whole paycheck as soon as he receives it on frivolous items or vices.

"What-To-Do Man: Works all day, spends his money frugally on essential items for his family and himself. Saves money in a bank account.

"Rich Man: Works all day knowing someday he will never have to work again. Brutally tight with finances. Meticulous on how much he spends and on what. Not cheap and purchases quality items. Saves (a) minimum (of) 10% from every paycheck. Uses these savings to invest in a multitude of different businesses and investment vehicles. These businesses he buys or creates work by themselves to create money for him. Same with investments in stocks, bonds, mutual funds, insurance premiums, equipment rentals, etc etc. These investments make him money 24/7 all day every day for the rest of his life thereby adding more and more money to his growing pile. When Rich Man retires he lives off the interest ONLY of all his investments never touching the principal amounts if he can."

The relationship between inflation and the lower class isn't a new phenomenon, but experts like Loren Rice, professor of accounting and business at Clarke University, said that "There is no question" this inflation go-around is the most aggressive the U.S. will have experienced in nearly 40 years, the Telegraph Herald reported.

Rice points out the drastic changes that have occurred the past months. 

He said, “We have been wandering somewhere below 2% (inflation) every year for more than a decade. We are going to end up seeing inflation of 5% to 5.5% this year,” according to the Telegraph Hera 

During the last period of steep inflation in the 1970s and 1980s, prices rose between 12.5% and 15%, the Telegraph Herald reported. 

Rice said that while the last time inflation soared mainly due to soaring oil prices, this one is a byproduct of government spending that “causes the value of the dollar to go down and drives up inflation” in Iowa and around the country, Telegraph Herald reported. 

A Harvard CAPS/Harris poll that was shared exclusively with The Hill found that 85% of Americans are “somewhat concerned” about inflation and of that group, 45% reported being “very concerned.” The poll also found that nearly half of respondents don’t trust President Joe Biden’s Federal Reserve to properly handle inflation.

In addition, if the current tax and spending laws don’t change by 2031, the U.S. national debt will reach 107% of the gross domestic product, the highest level in U.S. history, according to a report released by the Congressional Budget Office.

The Federalist reported that the United States money supply has increased by 40% since the beginning of the COVID-19 crisis. Before the period of high inflation of the 1970s, the money supply had increased by just 13%.

Former Clinton administration Treasury Secretary Lawrence Summers warned the recent economic stimulus passed by the Biden administration will likely “set off inflationary pressures of a kind we have not seen in a generation," The Federalist reported.

Economists who are part of Chicago Booth’s Initiative on Global Markets U.S. Economic Experts Panel shared their thoughts on if the current combination of U.S. fiscal and monetary policy poses a serious risk of prolonged inflation. The survey showed there was "considerable uncertainty and difference in views" among the experts when 26% agreed with the premise, 21% disagreed and 40% were uncertain.     

“There wasn’t prolonged inflation with unemployment at 3.5%. Why would it be prolonged when, apples-to-apples, it is double that?” Chicago Booth's Austan Goolsbee said.

Daron Acemoglu of Massachusetts Institute of Technology and Richard Schmalensee of Yale agreed that inflation is more likely but thought that the qualifiers, serious and prolonged, were “too strong” and “seem a reach,” respectively.

Francesco D’Acunto of Boston College and Michael Weber of the University of Chicago don't see a temporary increase in inflation as a long-term threat to the economy. Given the fading inflationary pressure in the medium run, they “do not see any evidence for the Biden administration to change its policy agenda because of mounting inflation on the horizon,” according to a post Washington Center for Equitable Growth's website.

Mark Vitner, a senior economist for Wells Fargo’s Corporate and Investment Bank, said current inflation trends won’t come close to historical periods of inflation. 

“Most of the run-up in inflation that we are seeing is due to some temporary supply shortages and bottlenecks in the supply process because one or two key parts are missing, such as semiconductor chips,” Vitner said, according to the The Business Journal.

Tim Congdon, chairman of the Institute of International Monetary Research, who wrote that the Fed, filled with New Keynesian economists, is underestimating the current risk of inflation because they are paying too little attention to the amount of money being injected into the money supply in an opinion piece for The Wall Street Journal.

Lawmakers who are fighting for income equality mustn't overlook basic economic warning signs such as income, inflation and rates of employment by the demographic, according the June 20 opinion piece in the Journal.