New Research Note examines Changes in Inflation Rates across Income Groups

New research published today (Tuesday, 29th September 2015) by researchers at the ESRI considers how inflation rates have changed across different income groups. The Distributional Impact of Inflation: 2003-2014, by Brian Colgan and Tim Callan (ESRI), examines inflation rates for low and high income households across two periods, 2003-2008 and 2009-2014. Background Low and high income households purchase different baskets of goods and services. As a result, the rates of inflation for low and high income households can differ from inflation as measured by the Consumer Price Index, which is based on a basket of goods averaged over all households. Findings The study finds that during the years 2003 to 2008 inflation for low income households was below the average inflation rate, and inflation for high income households was above average. This pattern was reversed in the recession (2009-2014), with faster inflation for the lowest income groups and slower than average inflation for those on the highest incomes. Housing costs were a major factor contributing to this pattern. Low income groups were more likely to rent their homes, while high income groups were more likely to have a mortgage. Differences in the inflation rate for renters and for those with mortgages (the latter depending on both house prices and interest rates) help to explain the differences in overall inflation experience for both high and low income groups. Brian Colgan, a co-author of the paper, said “While the inflation differentials across income groups have been modest compared with those in the UK, regular monitoring of differences in inflation rates across different income groups should be considered.”