![]() As one becomes wealthier on a real dollar basis, it is reasonable to assume that one would substitute away from goods and services considered necessities and toward those considered luxuries. Since 1984, price inflation for consumer goods, as measured by the Bureau of Economic Analysis’ Personal Consumption Expenditure Index, rose at a very moderate average rate of 2.4 percent annually. The income effect states that as consumers’ incomes rise, their consumption will also increase, up to a point of satiation, while the substitution effect states that consumers’ consumption patterns are affected by changes in the relative prices of goods (that is, as prices rise for a given good, consumers will reduce their consumption of that good where possible and increase their consumption of a substitutable good that provides them a comparable level of satisfaction). Such changes are caused by myriad factors, but one way of thinking about them is in terms of income and substitution effects (which comes from the theory of microeconomics). All of these changes in income had a direct impact on spending.īecause of the significant changes in the rate of income growth by income class over the last few decades, the consumption patterns of different income classes may also have changed. ![]() ![]() For example, data obtained from the Bureau of Labor Statistics’ Consumer Expenditure Survey show that the highest income quintile in the US experienced an increase in nominal income of approximately $7,100 between 20, while the lowest income quintile experienced a decline of approximately $360. Meanwhile, incomes actually fell for the bottom 20 percent of earners. The data show that the top 20 percent of earners accounted for more than 80 percent of the rise in household income from 2008-2012 (figure 1). Each quintile represents 20 percent, or one-fifth, of all households. To gain insight into the evolution and distribution of income in the United States, economic researchers often delineate the population into income cohorts known as “quintiles.” Households are divided into quintiles according to their gross income. While average income has returned to pre-recession levels, income gains have been distributed unevenly. Much has been written regarding the growing disparity between the wealthiest and poorest Americans in the aftermath of the Great Recession. Income Inequality, Inflation, and Consumption For the highest income quintile, however, there has been growth in the relative consumption of luxuries. I find that for lower and middle income quintiles, the share of total inflation-adjusted (real) consumption going to purchase necessities has contracted since 1984, while the share of the total going to purchase luxuries has remained fairly constant or slightly increased. In this Commentary I introduce a metric for distinguishing luxuries and necessities in consumption data produced by the Bureau of Economic Analysis and use it to reveal trend changes in consumption patterns for different income classes over the past three decades. Despite this divergence in findings, it would be useful to know whether the consumption patterns of individuals in different income classes have been reordered over the same period that income inequality has increased. ![]() 2010, Fisher, Johnson, and Smeeding 2013, Meyer and Sullivan 2013), while others have found that the rise has been fairly similar (Aguiar and Bils 2012, Attanasio, Hurst, and Pistaferri 2013). Many studies have found that consumption inequality has risen less than income inequality in recent decades (Cutler and Katz 1991, Krueger and Perri 2006, Heathcote et al. The research findings on the presence of consumption inequality, however, remain somewhat mixed. This is an important question because consumption is clearly a better measure of an individual’s well-being than is his or her income. As income inequality has increased in the United States, researchers have rightfully asked whether it has also led to inequality in relative consumption. ![]()
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