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Independent, objective, nonpartisan research
Blog Post · January 21, 2022

Starting the Year with Less (Real) Money

photo - Woman Paying for Groceries

Californians are starting out the year facing notably higher prices in key areas of their budget. Inflation concerns have roiled the stock market and pushed the Federal Reserve to plan actions aimed at stabilizing prices. In the meantime—and perhaps for some time to come—price increases have real impacts on family economic well-being, especially for those at the lower end of the income spectrum.

As of December, prices are up 6.5% in the Pacific region—Alaska, California, Hawaii, Oregon, and Washington—compared to a year ago, slightly below the 7% nationwide rate. (California drives most of the Pacific region’s economy.) This is a significant increase over 2020, in which prices grew by 1.6% in the Pacific and 1.4% nationally.

Here, to give a more complete sense of how prices have changed since the onset of the pandemic, we combine two years—2020 and 2021—and measure changes since 2019. Using this method, we find that prices in the Pacific are up 8.2%, a rate similar to the US overall (8.5%)—the largest two-year price increase nationally since 1991.

Prices have increased even more in specific categories. In the Pacific, the price of food and beverages has increased 12% since 2019, and energy has increased 23%—both a bit more than in the US overall. Gasoline has increased even more: 24% in the Pacific region and 27% in the US. Notably, increases in gas prices have been entirely concentrated in 2021: gas prices actually fell by roughly 15% in 2020. Swift increases in these three categories—food and beverage, energy, and gasoline—have combined to drive the overall price index to the highest level seen in decades.

Price increases for medical care and shelter are small in comparison, and are roughly on par with their changes in the past two decades—they are much lower than the large increases experienced during the 1970s, 80s, and 90s. Notably, though the two-year increase in shelter costs is not abnormally high, the annual increase from 2021 alone (4.1% nationally, 3.4% in the Pacific) is the highest nationally since 2006, the peak of the early 2000s housing boom.

How do these price increases affect Californians? Of course, family spending varies greatly depending on circumstances, especially financial. Because of this, increases that families feel in their everyday spending varies meaningfully across the income distribution. In 2019, low income families (in the bottom fifth) spent 83% of their budget, or $26,500, on essentials like food, shelter, clothing, transportation, and health care. Top income families (in the top fifth) spent substantially more on these items, about $82,000, but this constituted are much smaller share of their total spending (64%).

Because of these different spending patterns, the effective price increases families have faced during the pandemic also varies. We estimate that the lowest income families have experienced an overall price increase of 9.6% since December 2019, while the highest income families have seen something more like an 8.2% increase.

In dollar terms, to purchase the same things they bought in 2019, the lowest fifth of families would need to spend an additional $3,000. Top income families have more resources at their disposal—but to maintain their level of consumption amid rising prices, they would need to spend an additional $10,000.

During the pandemic, increased wages  and income may have buffered against these price increases. But for those who haven’t seen at least an 8% rise in income since 2019 (and higher for lower income residents), real purchasing power has fallen behind. Moreover, for those who are unemployed or working in low-wage sectors, price increases at this level worsen existing challenges to meeting basic needs.

Federal and state support for households during the pandemic—such as increased food assistance, direct stimulus payments, and tax credits to families with children—may have helped with higher costs. However, most of these policy responses were temporary and have now expired. While federal policymakers work to temper price increases in 2022, state policymakers have decisions on the horizon about the best use of record high state revenues.

Careful attention should be paid to the disparate impacts of price increases on households of varying means and to policy tools that could be deployed, even temporarily, to help California’s most vulnerable residents—already pinched by the state’s high cost of living—keep up with their basic needs.

Topics

coronavirus COVID-19 Economy Health & Safety Net inflation Poverty & Inequality wages