Inflation, Poverty...and Climate Change?

Inflation is not often a big focus of conversation among advocates for those with lower incomes. When it is, it is often in the context of perceived or actual trade-offs between inflation and unemployment rates. However, inflation has indirectly come up in recent discussions among anti-poverty advocates insofar as automatic inflation adjustments to the Child Tax Credit's refundability threshold punish workers whose earnings do not keep up with inflation. Occasionally, folks point out that the primary inflation index used by the Federal Government, the Consumer Price Index for All Urban Consumers (CPI-U), overstates inflation, and that this fact means that annual adjustments to the poverty threshold exceed what they ought to be. While the CPI-U does indeed seem to overstate inflation, the criticism misses the point altogether with regard to what the poverty threshold ought to be. I'll leave that discussion to a future post and this link to a hearing I worked on.

I do want to highlight here interesting papers by the Swiss investment bank UBS on the economies a few rich countries, including the United States: "Unequal economics?" and a follow-up "Income inequality revisited". The papers are focused on inequality--and have a lot of interesting things to say about it, and I'll highlight those points in a future post--but I bring these two papers up because they are among the few analyses I have seen that look at whether low-income folks face higher inflation than higher income folks. And the answer is yes. According to the analyses, this is in part, as many would expect, because energy costs have tended to rise faster than other expenses and are a larger share of lower-income folks' budgets. More interestingly, the analyses also find that this divergence in inflation rates between lower and higher income groups is in part due to increasing inequality. I guess that's one more downside to increasing inequality.

With regard to the higher share of income income folks devote to energy expenses, Bob Greenstein at the Center on Budget and Policy Priorities delivered an unsurprisingly thoughtful testimony before the House Committee on the Budget on how climate policy might impact the federal budget and household budgets of people with low incomes. The testimony is well worth a read and highlights a few principles that ought to be considered as we mitigate against and reverse the damage of global warming. The conclusion of the testimony is critical: distributional effects of climate-change policy need not hurt the poor or increase inequality, but without special attention to these concerns, they certainly might.

In essence, inequality and increased energy costs--the later a near certainty in any effective climate policy, something we desperately need--can fuel higher inflation, i.e. costs for goods and services, for lower-income Americans. These phenomena can and should be addressed, and maybe one starting point is a proposal to create millions of new Green Jobs, which, as Van Jones has vigorously advocated, could simultaneously fight poverty and climate change.