"Different Market Baskets for Different Income Levels"

Richard Green wonders if there are measures of the cost of living that vary according to income group:

Different Market Baskets for Different Income Levels, by Richard Green: I keep reading stories about food pantries being under particular pressure this year. The stories would be more helpful if they could explain explicitly why the food stamp program (perhaps the most successful anti-poverty program in the US) isn't sufficient to prevent this. We do know that not everyone eligible for food stamps uses them, but this has always been true, and so wouldn't explain a change in demand at the pantries; we need to look elsewhere for an explanation.

My suspicion is that an accurate measure of CPI would vary by income group. The most obvious example is that low income people spend a higher fraction of income on heat, electricity and transportation than higher income people. Even if the entire CPI is flat, if the energy and transportation sectors see large rises in prices, it will likely have a particularly large impact on the bottom quintile of the income distribution, and hence cause real incomes within this group to fall. Of course, gas and heating oil prices gave risen a lot over the past couple of years.

When I look at the BLS web site, I don't find anything about different market baskets for different income classes--I do wonder if there is something out there.

Anyone? The best I can do is this 1998 working paper from the IMF ("Is the United States CPI Biased Across Income and Age Groups?," by S. Nuri Erbas and Chera L. Sayers) showing that the CPI understates the true cost of living for older and/or poorer households, and overstates the rate for younger and/or richer households. See, in particular, Table 3, Tables I2 and I3 in the appendix, and Chart 1.

I can think of public policy reasons to avoid having more than one measure, e.g. the potential for perverse incentives when earning additional income can change the CPI used to adjust income for changes in the cost of living, the cost of calculating more than one measure, and the difficult theoretical, statistical, and political problem of defining official income classes (how many income classes, where to draw the line between classes, what income measure to use, what exclusions to allow, etc.). But even if problems such as these prevent us from actually implementing cost of living measures that differ by income group, the extent to which the market basket and the associated cost of living varies across income (and other) groups is an interesting and important question.

Comments

[esb]

This sounds like a job for Tim Duy ... "The Lane County Middle-Income Quintile Cost of Living Index."

Are you up to it, Tim?

Just make sure that you use a start date of 1January2007, so that we can see the horrors of 2007 for those in "the middle."

[mark]

Maybe the Austrian school is right?

Real inflation is just the increase in money supply. It wouldn't surprise me if basic neccessities didn't move lock step with the CPI number. After all, there must be diminishing returns with respect to increasing productivity with respect to those products.

All those who advocate the current Social Security Government Owned system should be happy. Granny will get a 3% increase for the CPI and have to pay an extra 10% for food.

[James Kroeger]

It's nice to see that you have taken an interest in this subject, Mark. You weren't quite so interested when I posted the following on your website back on June 16, 2006:It is possible to measure the different rates of inflation that different income groups experience by putting together a number of different "market baskets" that are appropriate to different groups of income earners. The higher your income bracket, the greater the weighting of certain spending categories, like 'purchases of real assets.' What this kind of data would reveal to us is that when the Republicans start throwing money at rich people as is their wont, it ignites a strong round of inflation within their income group that is ultimately reflected in the higher prices paid in the stock, real estate, and art markets. It costs more to be rich than previously.

So what sense then does it make to refer to THE Inflation Rate? Inflation is not a phenomenon that has some kind of 'blanket effect' on the fortunes of all income earners. People in different income groups are going to experience different inflation rates, i.e., different rates of change in the "cost-of-living." Shouldn't that matter to us when we are trying to formulate policy options?

The index number that everyone uses to measure Inflation, the CPI, is weighted to to reflect a fairly narrow cross-section of America's income earners. Let's ask the Bureau of Labor Statistics to calculate a number of different inflation rates that affect different income groups, based on different market baskets of purchases. Price increases in assets markets need to be included in the calculation (properly weighted) because such purchases are an important part of a rich person's standard of living.

The single index number provided by the BLS hides a lot of important information within it that policy makers need if they want to formulate sound policy. If we could stop generalizing about inflation when it is not appropriate to generalize, we might actually be able to start having meaningful discussions about the so-call evil of Inflation. Perhaps we'll discover that it doesn't seem quite so important for us to protect creditors from the harm they'd suffer from a 7.5% CPI inflation rate, when the actual rate of inflation they are personally experiencing is much, much higher.

I actually did a research paper on this topic when I was in graduate school.

I would encourage you, Mark, to give this subject some additional thought. The kind of information that a spectrum of market baskets would give economists ought to make economists take a look at a number of public policy discussions in a new way. Looking back, we'd see that the wealthy have experienced 'run-away inflation' during the past couple of decades, driven by the Republican Party's giveaway of disposable dollars to that privileged class. This happened at the same time that the working class has experienced comparative disinflation, driven by outsourcing and immigration pressures.

I find it interesting to note that the wealthy do not complain about this kind of inflation; indeed, they rather like it. The only inflation they really care about is the inflation of working class incomes, for those incomes are generally a cost faced by the upper class. Might not a more expansive picture of inflation reveal to us the assiduous efforts of the investor class to inflate their own incomes while at the same time deflating or disinflating the incomes of the working class?

From a purely pedagogical perspective, I can't fathom why any economist would not welcome a much more accurate picture of how 'inflation' varies across income groups, especially over time.

[robertdfeinman]

It's obvious that different sectors of society spend their money differently. Just today there is an article in the NY Times about poor sales at Target. The guess as to why this is so is that their demographic sector (women shoppers with a median income of about $40K) are feeling the pinch and restricting their purchases to essentials.

Before the shopping season it was thought that the pinch would occur slightly higher up in the Macy's bracket and these people would shop "down" at Target.

So if retailers know who their customers are and what affects their buying habits why is it such a stretch for economists to come to the same conclusion?

Condo sales in NYC are doing just fine, they're seen as a bargain by foreigners since they are priced in weak dollars.

The place where having an accurate cost of living measure matters is among the lowest classes and the elderly. A good deal of their income is based upon government programs and those opposed to social programs see it as important to keep the measure of cost of living as low as possible to minimize their (inflation adjusted) benefits.

The deeper you look the more you find the Puritan and Libertarian ideologies behind most policy implementations.

[Noni Mausa]

I would say that the cost of living is not a smooth, continuous increase, but changes in a stairstep manner as income rises or falls.

For example, at a certain income level healthy adults in a suitable climate might replace an automobile with a bicycle. It might even be a very good bicycle. A slight increase in wages will not make the bicycle grow larger or allow the consumer to buy an extremely small car. There is a discontinuous jump between bicycle and car.

The same for housing purchases, and day-to-day expenses like restaurant meals, clothing purchases etc.

Of course the topic is complex. I'm not sure how one would approach researching this, but I do know that there is a stickiness in each level partly put in place by habit and partly by expectations.

One example -- when I was a college student, by definition always scraping for pennies, I developed a habit of shopping in secondhand stores and thrift stores. I got pretty good at it, too, and now it's one of my favorite recreations and remains so even though for many years of my adult life I had no need for thrift shop bargains at all.

Of course I'm only one consumer, but the lifetime affect of my shopping secondhand could be as high as $100,000 not spent in clothing stores, on kitchen appliances, toy stores, and other retail shops. This has turned into a very sticky habit, which has the additional effect of affecting what I'm willing to pay in other stores. For instance, the idea of spending $25 for an ordinary T-shirt I find ridiculous.

Does anyone track the number and location of secondhand stores, and their growth over the past 30 years? I do know that 30 years ago it was considered shameful to have to go to such places -- today, places like Value Village (known as Savers in the States) and the Salvation Army thrift stores have proliferated and are full of shoppers who span the income level from quintile one to quintile three or higher, without a hint of embarrassment.

Noni

[calmo]

I see this cleavage mostly in the way "inflation" is based on CPI and not Europe's M3. The monumental effort is about what the cows are eating, not about what the cowboys are eating and drinking.
Sorta.
Consider the largest consumer good and the compilation of the house price as a weighted OER to avoid the "volatility" of the actual price it is said, but really it is to avoid the investment aspect and provide a tool to keep official inflation numbers low and government entitlement spending tied to inflation, low.
It is an increasingly partial measure of the economy as the non-financial portion shrinks, yes?

[ken melvin]

Try, I beseech you, try to envision a investment based economy.

[evagrius]

Mr. Green should examine Food Stamps eligibility and benefit/allotment rules before making the assertion that, somehow, receiving Food Stamps is enough to prevent one from having to use emergency food pantries.
The allotments or amount of Food Stamps individuals and families are eligible for has definitely not kept pace with the cost of food. Further, the convoluted process by which the allotment is determined also does not reflect the true cost of living, ( i.e; the cost of housing and utilities, for instance).
I really wish economists would seriously examine the Food Stamps Elibility guides of each state, ( yes...each state has its own set of guidelines and allotment rules). If they did, they might conclude that the program is woefully inadequate.

[Jean]

Noni Mausa, I LOVE thrift stores!!!!!! Pre-owned. It seems like a good way to reduce ones' carbon footprint, tho I've never measured it. I've done it for years and I don't look like Diane Keaton. And I don't feel like I'm supporting any child labor/sweatshop horror. (Altho, I know that cl/sh are often all they have...god the conscience of a liberal...).

[notsneaky]

One thing I've always wondered - and unfortunately this kind of data nitty gritty is never taught in grad school since it's more the province of gov agencies rather than academia - is how MEDIAN REAL wages are calculated. A lot of attention is paid to what has happened to median wages in US over time, rather than average wages, and that's as it should be. But while it's probably relatively straightforward to calculate the median nominal wages, what are these deflated by? My, possibly mistaken, impression is that in fact REAL median wages are calculated from the NOMINAL median wages by deflating them by the overall CPI, which of course uses the consumption basket of the AVERAGE household. But it's pretty likely that the consumption basket of the median household is different from that of the average. Am I wrong?

What we need here is some Engel curves and a Cournot or Engel aggregation (I always forget which is which).

[Jean]

Noni Mausa, I LOVE thrift stores!!!!!! Pre-owned. And it benefits MY community. It also seems like a good way to reduce ones' carbon footprint, tho I've never measured it. I've done it for years and I don't look like Diane Keaton.

I don't feel like I'm supporting any child labor/sweatshop horror. (Altho, I know that cl/sh are often all they have...god the conscience of a liberal...).

[hari]

The CPI in EU market(s) is responsibility of Eurostat (Lux). I don't know who is responsible for CPI in US. May be Sec. Commerce...

It may not be a bad idea to get Eurostat and US Agency to workout a system (if it's possible) to mitigate some of the problems associated with the index.

It's automatic here that property owners will issue new rental rates beginning 2008 based on Eurostat (CPI) index.
No one has the capacity to control how the damn thing is calculated, and if it's reliable!

[Economists for Obama]

This issue comes up a lot at the World Bank. By the methodology the Bank usually recommends for developing countries, the poverty line is established using a fixed basket of goods thought which is representative of consumption patterns for the poor, evaluated at nominal prices. This poverty line is updated over time by recalculating the nominal cost of that same basket. So effectively, the set of poverty lines gives you a "poor person's CPI" which differs from the government's overall CPI. This issue was also discussed in a recent Bank report for Latin America. I will look for the link.

[James Killus]

The idea that inflation is solely a monetary phenomenon is pernicious, a monetarist tautology.

"Supply-side" deflations and inflations are quite common, with the current oil supply created inflation being just a recent example. The agricultural deflation in the 19th century was caused by the opening of vast new lands to farming, plus the creation of transportation networks to move the food around.

I've long pondered the examples of "technological deflation" where certain technological goods ride a wave of advancement and lowered prices to rapidly saturate a market. Computing is one of these, but telecommunications and transportation were earlier examples (contrast the ten word telegram of 1900 with a ten minute telephone call of today).

There is an attempt by some economists to call technological deflation a "hedonistic" effect, but it's vastly simpler to call it deflation. If an ancient king sent runners to the mountains to collect snow which was then flavored with honey and berries, why not compare this to a sno-cone, and consider the relative resources involved?

But the deflationary effects of technology don't hold a candle to some of the inflationary effects that can occur. It has become literally impossible to obtain certain sorts of fine grained hardwoods, because the old growth trees involved no longer exist. World wide fish production has peaked and the price of fish will climb in the future. The ethanol industry is being blamed for the current rise in food prices, but there are many other culprits to be found.

Asset price inflation amounts to promises of future economic demand. If there is no attendant increase in the ability to meet future demand, the result is either future inflation, or a collapse in asset prices. Neither outcome has much in the way of fun going for it. Ultimately, it will come to a question of whose demand will not be met, those of the general populace for necessities, or those of the elites who spend for power, status, and pleasure.

[W]

The BLS has experimented some with group specific indexes. I think there is an elderly index and there was an experimental one for the poor in 1996 (see link below).

http://www.bls.gov/opub/mlr/1996/09/art5full.pdf

[computer.economist]

The Chicago Fed has developed such a measure for quite a few different income, social, racial, age, etc. You can read more on their front page: http://www.chicagofed.org/community_development/chicagofed_ibex_consumer_price_index.cfm

I haven't had a chance to go through and examine how the measures are done. If it is the same basket examined for the different groups, or if each group gets its own basket (I would like to see it sliced both ways). But yea, that is pretty much what you are looking for.

[Donald A. Coffin]

The BLS lists a number of general CPI mmeasures on its website; the two that might be most relevant to this discussion are the CPI for all urban consumers and the CPI for urban wage earners and clerical workers. They are virtually identical. The BLS also provides sub-indexes of the CPI, focusing on specific commodity groups, or excluding specific commodity groups. These are:

All items less food and energy
Food and beverages
Housing
Apparel and upkeep
Transportation
Meidcal care
Medical care services
Recreation
Education and communication
Other goods and services

There are much more detailed specific commodity and service indexes as well.

The Consumer Expenditure Survey reports the distribution of spending by income quintiles. Here are some differences in the distribution of expenditures, comparing the lowest income quintile, and the highest:

...................Lowest......Highest
Food:..............15.9%.......11.1%
Housing............39.4%.......30.6%
Transportation.....14.3%.......17.6%
HelathCare..........7.6%........4.4%

And so on.

So it's possible to construct price indexes for income quintiles by using the price indexes for commodity groups and the weights from the CES. I've never done this, but it's clearly within the realm of possibility for anyone willing to do a little work.

[Callahan]

I would not be suprised to see that some of you smugsters in the upper middle may find yourself becoming part of the great UNPOOR (middle-middle)in the not too distant future. However if that does happen to you, then my struggle to hang on to the lofty UNPOOR status will be failing completely.

Needless to say, I wish you well.