Inflation Inequality Leads to Three Million More People in Poverty

Individuals in Poverty Under the Official Threshold and Inequality Inflation Adjusted Threshold, In Millions, 2005-2018

It is widely recognized that income inequality has skyrocketed in recent decades. Incomes at the top of the distribution have grown rapidly, far outpacing income growth at the bottom. Recent research also shows that prices have risen more quickly for people at the bottom of the income distribution than for those at the top—a phenomenon dubbed “inflation inequality.” An implication of this new finding is that we may be underestimating income inequality and poverty rates in the United States—two national statistics that rely heavily on the annual inflation rate as part of their calculation. In this brief, we utilize an adjusted inflation index that accounts for inflation inequality across the income distribution and re-estimate recent trends in poverty and income inequality from 2004 to 2018. Our adjusted inflation index indicates that 3.2 million more people are classified as living in poverty in 2018, and that real household income for the bottom 20 percent of the income distribution actually declined by more than 7 percent since 2004. These results show that inflation inequality significantly accentuates both the incidence of poverty and income inequality.