How Inflation Helps--and Hurts--the Poor

THE burden of inflation, President Nixon has often said, falls heavily upon the poor, "who are largely defenseless" against price increases on the necessities of life. That view is seldom questioned by politicians, but a growing coterie of economists has lately come to regard it as a misleading oversimplification. Affluent America knows surprisingly little about precisely how inflation affects the poor. What information is available, though, suggests to some experts that inflation—or at least some of the conditions that contribute to it—actually helps many of the poor more than price boosts hurt them.

This heresy has been argued most forcefully by Economists Robinson G. Hollister and John L. Palmer in a study for the University of Wisconsin's Institute for Research on Poverty. They contend that the labor shortages produced by an inflationary boom enable many of the poor to land jobs that otherwise would remain beyond their reach. Using complex mathematical formulas, they support earlier calculations that a reduction in the unemployment rate from 5.4% to 3.5%—experienced by the U.S. between April 1964 and November 1966—creates 1,042,000 full-time jobs for poor people who otherwise would be working only part-time or not at all. As for the non-working poor, Hollister and Palmer found that welfare benefits have generally risen faster than prices. The average monthly check in the program to aid families with dependent children rose 18% during the two years that ended last June. Meanwhile, the consumer price index went up 10%.

The Poor Price Index. Actually, price increases are less painful for the poor than for the middle class and wealthy, the two analysts maintain. They have rejiggered the figures in the Government's consumer price index, which is largely based on middle-class spending patterns, to construct a "poor price index"; it gives more weight to increases in food and rent expenses, less importance to rises in clothing, transportation, medical and education costs. Between 1965 and 1967, the last year for which they calculated the poor price index, it rose 5.1%, compared with a 5.8% increase in the CPI. The Wisconsin researchers conclude that "the poor are not hurt by inflation"—but could be hurt badly by even a "slight" rise in unemployment resulting from a fight against inflation.

This thesis impresses many eminent economists. Says Walter W. Heller, former chairman of the President's Council of Economic Advisers: "I think we have to be very, very careful in suggesting that inflation is the enemy of the poor. It may be their friend in employment terms." Some Government figures buttress the argument. For example, 800,000 of the 5,800,000 U.S. families that were officially defined as poor in 1966 had increased their incomes enough to rise above the poverty line last year. Their gains were achieved even though inflation had meanwhile pushed the poverty line up from $3,317 in annual family income in 1966 to $3,553 last year.