EC Two Pins Threatening Multiple Asset Bubbles

Only accounting for food and housing, two necessities, the lowest income classes saw their annual expenses rise by 6.05%. The highest income classes saw their expenses rise by 2.10%.

Who Can Afford Inflation?

The graph below, courtesy of Congressional Research Service – The U.S. Income Distribution: Trends and Issues, quantifies changes in income by income class. The data allows us to assess if wage inflation can offset price inflation.

As shown, the lowest income group saw incomes rise by 11% over the period spanning 2009-2019. That equates to approximately 1% a year. The highest income group saw their income rise by about 3% a year over the same period.

Inequality, Two Pins Threatening Multiple Asset Bubbles

The current annual increases in food and housing costs will require an additional 6.05% of income for the lowest wage earners to keep their financial position indifferent. Any amount less than that and they fall behind. Keep in mind that does not cover inflation for any other expenditures.

Stimulus checks may fill the immediate gap, but in the long-run inflation makes their financial difficulties worse.

The highest income earners will need to earn 2.10% more in income to cover recent price increases. Fortunately for them, that is below the recent rate of annual income increases.

The data above is further affirmed by the latest BLS employment data released May 7, 2021.  Per the BLS, wages rose 0.3% over the last year versus a 4.2% increase in CPI.

Why Investors Should Care

If the prices of food, shelter, and other necessities continue to surge higher without equivalent wage growth, wealth inequality will worsen. This problem represents a coming dilemma for the Fed.

When the media and politicians take notice, they will pressure the Fed on their inflation stance. If the Fed is persuaded or even forced to act, bubbles driven by the latest round of excessive liquidity, are likely to deflate.

Growing wealth inequality may be a needle in search of a bubble.

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William K. 1 month ago Member's comment

The explanation provided about the damage of inflation to those not in the top ten percent is exactly what I have been asserting for a lot of year. And yet the apologists for those making it happen keep explaining how beneficial inflation is. Hopefully the change can be brought about by actions other than public executions of federal reserve bankers and policy makers, at least I hope so. BUT, given the damage already done, such might certainly be deserved.

Perhaps a more civil method would be to assure that no policy maker would be, or have been, a member of the upper 50% wealth class. Experience certainly can be a very powerful teacher.