How Inflation Taxes the Poor


A boarded up house on a terraced street in Burnley, U.K


Anthony Devlin/Bloomberg News

The United Kingdom on Wednesday reported its highest inflation rate since 1982, and welcome to the 40-Year Club alongside the U.S. A new generation on both sides of the Atlantic is learning how erratic price swings can wreck an economy. And in that spirit, a brief research note from a London think tank is worth a closer look.

The official British consumer-price inflation rate out this week is 9% in April, but not everyone is suffering equally. For the first time in this inflationary cycle, the poorest British households are experiencing the largest price increases, according to calculations from the Institute for Fiscal Studies. The 30% of households with the lowest incomes saw the prices they pay rise by at least 9.7%, and as high as 10.9%. The top 10% of earners saw their prices rise by “only” 7.9%.

The reason is that people at different income levels spend different proportions of their earnings on different goods and services. Such a “consumption basket” is an integral if little discussed element in calculating the inflation rate. British inflation is driven by soaring energy costs, with household electricity and natural-gas bills rising 54% in April. Since energy constitutes a higher proportion of a low-income household’s budget—11% of total spending, compared to 4% for the highest earners—low-income Britons feel the sting of energy-price inflation more keenly.

That inflation acts as a highly regressive tax on lower earners is well-known among economists. But the misery low-earning Britons are experiencing now is not an abstraction. And it is becoming a political liability for Prime Minister

Boris Johnson,

whose climate fixations have done so much to push up energy prices. Don’t be surprised if President Biden and U.S. Democrats are the next to get a political education in this economic reality.

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