Why Low-Income Households Are Hit Harder by Spiraling Food Costs

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It’s hard to cut back when most of your money is already spent on covering necessities.

Key Point

• Low-income households spend less on luxuries, leaving less room for budget cuts.
• The cost of living in October was 7.7% higher than the previous year, with further increases in certain categories such as food and energy.
• The data suggests that households at the lower end of the wage range have already started digging into their savings to cover costs.

Inflation has made life difficult for many families this year, pushing up expenses on everything from putting food on the table to having a roof over your head. It has a huge impact on households. One reason is that households with low cash inflows have less leeway when it comes to cutting costs. Here are some other reasons.

1. Low-income households spend more on basic necessities

According to the latest data from the Bureau of Labor Statistics, the overall cost of living in October was 7.7% higher than the previous year. Meals at home he jumped 12.4% over the year, and energy services increased 15.6%. That’s a big deal for many families. But EconoFact research shows that low-income households spend almost three-quarters of their money on essentials like food, transportation, rent, utilities and cell phone service. Not much room to swing.

If all these costs rise dramatically, and wages do not rise accordingly, it will be very difficult to find the funds to cover the bills. Sure, families might be able to cut their cell phone costs down a bit. But they still have to buy food and pay rent. Households with high non-essential spending may cut back on luxuries such as vacations and car purchases. In contrast, families who already spend most of their income on necessities may have to decide between paying utility bills and putting food on the table.

2. Low-income households save less

Stimulus checks paid in the early stages of the COVID-19 pandemic provided a much-needed boost to the bank balances of many low-income households. Declining spending and stimulus payments meant that the amount of money Americans had in their savings accounts surged across the board.

That extra cash is buffering some households against some of the effects of inflation.

Unfortunately, that money only goes so far. bad? Low-income households are starting to run out. In fact, not only are low-income households saving less, but some are borrowing money to meet their living expenses.

Between the first and second quarters of this year, excess savings among the lowest-income quartile fell by 25%, according to Federal Reserve data. This is the biggest drop of any income group and shows how much these households are cutting back on their savings. Additionally, a Liberty Street Economics study, looking at credit card balances in various zip codes, found that low-income credit cardholders are now in more debt than they were before the pandemic. .

3. It’s hard to cut costs if you’re already buying the lowest priced item

There’s a lot of advice out there on how to cut costs. For example, you can switch to store-branded products or find ways to reduce food waste. But if you’ve already done that, it’s much harder to beat inflation. Plus, without the extra money to pay upfront, buying in bulk can be difficult.

Another problem is the skyrocketing transportation costs. This may make it difficult for some families to travel to low-cost stores to get better discounts. Less flexible about that.

Will Inflation Continue in 2023?

The good news is that inflation appears to be slowing. This means that prices may stop rising next year. However, prices are still high. Just because you see light at the end of the tunnel doesn’t mean you’re there yet. Meanwhile, those on the lower end of the wage spectrum continue to be hit hardest.

The specter of a looming recession is another concern. One of the best ways to protect your finances from a recession is to have an emergency fund that covers three to six months of his living expenses. Coping with unemployment and other financial problems becomes easier. Federal Reserve data suggests that low-income households are already saving less and may be having a harder time coping with the effects of the recession.