Low earners hit hardest by inflation as savings and pandemic aid

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.

Meanwhile, the lowest-paid workers were the beneficiaries of the biggest wage growth last year, as restaurants and other generally lower-paying employers competed for scarce talent.

But higher living costs for the lowest earners were more than triple their extra annual pay — $1,837 versus $578, respectively, according to the Wharton School report published Tuesday.

The dynamic means the lowest earners felt a decline in purchasing power in 2021, unless they were able to supplement earnings with other income like government benefits, according to Alexander Arnon, Zheli He and Xiaoyue Sun, who co-authored the report.

Higher earners fared better. Most households with $20,000 to $100,000 of annual income roughly broke even, while those with more than $100,000 came out ahead, according to the analysis.

For example, those households with more than $150,000 of income saw their annual wage growth outpace rising living costs by roughly $2,000 (or, $7,431 versus $5,483, respectively).

(Of course, experiences may vary within each income cohort. The analysis measures the median worker, or the one right in the middle of a group.)

It may sound counterintuitive that the highest earners came out ahead if their wage growth lagged that of the lowest paid. But their raises came on top of higher starting incomes, amounting to more money in dollar terms than the lowest earners. Plus, high-paid workers were more likely to remain employed throughout the year and work full time, according to the study.

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…