The Inflation Pain You Don’t See

Definitions of ‘middle class’ miss one vital factor that shows how much price hikes hurt Americans

By George Zuo. He is an applied microeconomist at the RAND Corp. Excerpts:

"Far more American households earn a middle-class income than enjoy a middle-class lifestyle. In a recent RAND study I co-authored, we defined middle-class households as those who spent 40% to 90% of their after-tax income on necessities: housing, food, clothing, transportation, education, child care, healthcare and personal-care products such as shampoo and toothpaste. We found that one-third of middle-income earners—and a disproportionate share of those who are young, black, Hispanic and single-parent households—couldn’t live a middle-class lifestyle.  

Inflation makes the problem worse. In a separate analysis, my colleagues and I applied our study’s definition to consumption profiles from September 2021 as a pre-inflation benchmark and one-year inflation rates separately for food, education, healthcare, housing, personal care, transportation, apparel and child care.

We found that the middle class grew last year, but for all the wrong reasons. If middle-class households didn’t cut back on any of those things—or get better-paying jobs—roughly 7.5% fell into the working class under our model. But 12.7% of the upper class fell into the middle class. Single parents, renters, younger adults, those without college degrees, and black and Hispanic households were all more likely to have been pushed out of the middle class by inflation.

Because of how inflation rates differ across goods and services, the lower the household’s income, the harder inflation hit. For middle-class households, the percentage of after-tax income spent on necessities jumped from 60% to 65%. For upper-class households, the shift was from 26% to 28%. Working-class households already needed 108% of their monthly income to cover the basics in 2021; in 2022 it was 118%. They are either dipping into savings, getting help from relatives or safety-net programs, or going into debt."