The average U.S. household will spend an additional $5,200 this year to buy the same goods and services purchased last year due to the effects of the inflation tax. This “inflation tax” hits low- and middle-income families the hardest because they often don’t have the sophistication or liquidity to invest in hedges against inflation.
U.S.consumers are experiencing the highest inflation rates since 1982. In February 2022, the overall Consumer Price Index (CPI) change in the last 12 months — one of the most widely used measures for inflation — was 7.9%.
Inflation tax gave low-income families got a 15.6% pay cut
The effects of inflation vary depending on the income and lifestyle of consumers. On average, this means that each U.S. household has to spend an additional $5,200 this year to buy the same basket of goods and services it purchased last year.
Everyone feels the effects of inflation, but lower-income families feel the pain more acutely because the cost of inflation represents a larger percentage of their incomes, and they often lack the sophistication or liquidity to invest in hedges against inflation.
We looked at the median household income for each quintile (chunks of 20% of the population), and this is what inflation costs each group as a percentage of their median income.
Households with incomes in the bottom 20% got a 15.6% pay cut because of inflation. What makes it worse is that lower-income families already spend a bigger chunk of their income on basic necessities, such as food, housing, and gas, which are often significant contributors to high inflation.
Medium- and high-income households may have to cut back on eating out or vacations to offset the cost of inflation, low-income families often have to cut back on basics, such as food and medical care.
How to protect yourself from inflation
Yes, it’s pretty bleak. Unfortunately, it’s likely to get worse before it gets better for low- and middle-income households. The medicine governments use to fight inflation includes increasing interest rates, lower spending on welfare programs, and wage and price controls — which can cause a recession and job losses. Again, these are measures that disproportionally hurt lower- and middle-income households.
There isn’t a one-size-fits-all solution to inflation, but there are things you can do to minimize the damage of inflation. Here are a three tips to consider:
- Invest in stocks. Look into companies that have the flexibility to increase their prices naturally during periods of inflation, such as commodity firms, utilities, and healthcare companies.
- Consider real estate. There are no guarantees in investing, but on average, housing prices do tend to increase over time, which can counteract the effects of inflation.
- Invest in yourself. One of the best ways to fight inflation is to increase your income, which you can often do by getting a quality education and learning in-demand skills.
For more information on inflation, check out our Inflation Study here. ou may have heard that the average U.S. household will spend an additional $5,200 this year to buy the same goods and
- Inflation tax will cause the average U.S. family to spend $5,200+ more this year to buy the same products and services it bought last year.
- Low-income families got a 15.6% pay cut thanks to inflation tax.
- Inflation tax hits low- and middle-income families the hardest because they often don’t have the sophistication or liquidity to invest in hedges against inflation.
- There are things you can do to minimize the damage of inflation, such as learn in-demand skills for high-paying jobs, and invest in real estate and inflation-proof stocks.
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.