Low earners hit hardest by inflation as savings and pandemic aid dwindle

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Inflation

Consumer prices in January rose 7.5% from a year earlier, the fastest annual pace in 40 years.

However, households don’t feel those price shocks equally.

The lowest-income working households (which earn less than $20,000 a year) faced the highest inflation rate of any income group in 2021, according to an analysis by researchers at the University of Pennsylvania’s Wharton School.

These families funneled more of their budgets to necessities like energy and transportation, prices of which grew more rapidly than other goods and services.

High earners fare better

Savings

Further, more than 90% of households with incomes below $20,000 spent more than they earned from working in 2021, according to the research — meaning many may have had to borrow or spend from savings to finance their lifestyles.

And research suggests low earners, who saw their savings grow during the pandemic, may soon deplete that cash buffer.

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Savings among the lowest-income families were still 65% above pre-pandemic levels by the end of 2021, according to a JPMorgan Chase Institute analysis published Wednesday. (These households represent the bottom fourth of earners, with take-home income below about $26,000.)

Their accounts were mainly buoyed by government benefits like stimulus checks, monthly payments of the child tax credit since July and enhanced unemployment benefits.

But their balances had been 120% higher in March 2021 relative to two years earlier — suggesting a savings decline, according to the analysis.

“They’re still elevated, but clearly on a downward trend for lower-income families,” according to Fiona Greig, co-president of the Institute and a co-author of the study. “That implies that the pace of their income isn’t quite keeping up with the pace of their expenditures,” she added.

Plus, their savings amounted to just under $1,300 at the end of 2021, which is “not a huge amount of cash on hand [that will] fuel spending for months and months and months,” Greig said.

Expiring federal aid may stress their accounts even more. Monthly child tax credit payments lapsed at the end of 2021, and federal student loan payments are scheduled to resume in May, for example.

Conversely, savings have been relatively stable for the highest earners (with more than $65,000 of income) during the pandemic, according to JPMorgan. Their balances remain about 30% to 35% over 2019 levels, or nearly $7,000 total.

Higher earners were less likely to qualify for certain government assistance; their elevated savings were largely courtesy of reduced spending during the pandemic, on things like travel and entertainment.

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