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Blog Post · May 23, 2024

Inflation Has Affected Family Spending

photo - close up of woman's hand checking grocery receipt after shopping

Inflation has remained stubbornly high for almost a year. Last week’s report of a 0.1 percent decrease on the annual rate of inflation, which reversed the worsening trend of previous months, was welcome news. Californians—especially lower-income households—are feeling the effects of inflation in the form of higher spending levels for necessities, even though wage gains have partially compensated for price increases.

After hitting 0% at the onset of the pandemic, inflation climbed steadily to a peak of 9% in June 2022. Since then, price increases slowed and have been hovering at 3.1% to 3.5% (annual rate) since October 2023. Inflation remains above the Federal Reserve’s target of 2%—a key factor in the  decision earlier this month to hold interest rates high.

While slowing inflation is reassuring, the period of high inflation has left us at uncomfortably higher price levels. Since April 2019, prices have increased by 23% on average. Had the economy been operating at the Fed’s annual inflation target (2%), prices would be just 11% higher than they were five years ago.

Prices have increased unevenly across goods and services—with varying effects across households at different income levels. Food prices are up 27% compared to April 2019, and gasoline is up 29%. While expenditures on these goods and services make up large portions of most household budgets, lower-income households spend almost all of their resources (83%) on food, housing, transportation (including gasoline), and health care. Middle-income families spend 75% on these necessities, and high-income families spend 64%. Inflation has hit lower-income Californians hardest because price increases have been a bit worse for the necessities that make up a disproportionate share of their spending. The same set of necessities would cost low-income households 22% more today than in 2018–19. By comparison, middle-income households would spend 20% more, and high-income households would pay 17.5% more.

In 2018–19, these necessities cost California’s low-income households about $26,000, on average; by 2024, these households would need to spend over $32,000 on the same goods and services. By comparison, the top income group spent on average $82,000 on these basics in 2018–19, which would now cost nearly $100,000 in 2024. Of course, families seeking to make the best use of their resources might search harder for deals and/or buy goods/services of lower quality or in smaller quantities.

Fortunately, rising wages have provided some salve for higher prices. The best data for tracking individual wage changes over time is at the national level; it shows that gains have been larger for lower-wage earners. From March 2019 to March 2024 (the latest month of data), the lowest quarter of earners nationwide have seen inflation-adjusted wage increases on the order of 8%, compared to -1% for the highest quarter of earners.

One other factor to consider is that inflation may also be affecting non-wage income that many Californians rely on. Asset values are affected by inflation and high interest rates; this is an issue largely for higher-income and older Californians. California’s business owners and self-employed could also be seeing reduced earnings due to higher costs. Taking all of this into account, in total  low incomes have increased while middle- and higher-incomes have fallen slightly.

Lastly, while California’s current budget deficit would be challenging in any macroeconomic environment, high inflation and interest rates make state and federal decision-making on fiscal issues such as taxation and safety net spending more difficult. And rising wages and prices put additional pressure on the provision of government services. With inflation expected to remain elevated this year, it will be important to continue tracking its effects on families, businesses, and state policy choices.


Economic Trends Economy income inflation Poverty & Inequality wages