“Inflation” might be a word you’ve heard floating around when people complain about the price of items or the state of wages, and especially income inequality, but what exactly is it? In short, inflation is the necessary cost of an expanding economy. The Federal Reserve, which has the power to change the national interest rate, keeps rates low to stimulate spending. This drives demand and ultimately, economic growth.
For instance, the dollar has lost a lot of value in the past 100 years, which was caused by inflation. In 1915, a person with $4.26 could buy the same amount of food, clothing, and other necessities as $100 would buy today.
The Federal Reserve targets a 2% core inflation rate, meaning that as long as prices (excluding volatile food and energy) only rise 2% a year, the economy is expected to grow at a healthy rate. In the U.S., the annual inflation rate is 0.1%. Unfortunately, not everyone’s income increases more than 2% a year along with interest rates. This is one source of income inequality.
Over the past few years, however, Income inequality has been on a steady rise. From 2000 to 2006, average wages remained flat despite an increase in worker productivity of 15%. In those six years, corporate profits increased 13% per year. And that was before the recession, which exacerbated economic inequality in general, delivered a devastating blow to the U.S. economy.
Indeed, this massive gap in earnings is one of the major issues addressed by social justice workers, the media, and politicians. It is often met with public outrage, especially after the 2008 recession. The Pew Research Center reports that approximately 61% of Americans say that the U.S. economic system favors the wealthy, while just 35% said that it’s fair to most people. A similar share (66%) of Americans said the gap between rich and poor had increased in the past five years, and near three-quarters of respondents said the rich-poor gap was either a “very big” (47%) or “moderately big” (27%) problem.
Perceptions of income inequality also vary by class, with 54% of low-income people and 49% of middle-income people calling the rich-poor gap a “very big” problem. Only 36% of high-income people agreed. A third of the high income group said the rich-poor gap was either a small problem (19%) or not a problem at all (14%).
Rising interest rates and stagnant wages drive many people into debt cycles and eventually into worsened states of poverty. There is some government aid, and people can file for bankruptcy should they become unable to manage their debt. Some people, if they already receive them, even sell their structured payments. Selling off an annuity can cost surrender charges of up to 10%, but it can help some people get the cash they need to help get ahead of the challenges posed by inflation.