Why Low-Income Households Are Hit Harder by Spiraling Food Costs

If most of your money already goes to covering essentials, it's hard to make cuts.

Inflation has made life difficult for a lot of families this year, pushing up the costs of everything from putting food on the table to keeping a roof over your head. However, rising prices have had an outsized impact on low-income households. One reason is that households with less cash coming in don't have as much breathing space when it comes to cutting costs. Here are some other reasons why.

1. Essentials make up a bigger share of spending for low-income households

Latest data from the Bureau of Labor Statistics showed that overall, living costs in October were 7.7% higher than the year before. Food at home has shot up 12.4% in a year, while energy services increased by 15.6%. That's rough for many families. But according to research by EconoFact, low-income families spent almost three-quarters of their money on essentials like food, transportation, rent, utility costs, and cellphone services. There isn't a lot of wiggle room.

When all those costs rise dramatically without a corresponding jump in wages, it's incredibly difficult to find money to cover the bills. Sure, a family might be able to cut their cellphone costs a bit. But they still need to buy food and pay rent. Households that have larger amounts of non-essential spending could hold off on luxuries such as taking a vacation or buying a car. In contrast, families who already spend the majority of their income on essentials may have to decide between paying a utility bill or putting food on the table.

2. Low-income households are less likely to have savings

The stimulus checks paid out during the initial phases of the COVID-19 pandemic provided a much-needed boost to the bank balances of many low-income households. Decreased spending and stimulus payments meant the amount of money Americans held in savings accounts shot up across the board.

That extra cash has cushioned some households against some of the impact of inflation.

Unfortunately, that money only goes so far. Worse? It's starting to run out for households that bring in less money. Indeed, not only do lower-income households now have less savings, some are also taking on debt to cover essential living costs.

According to data from the Federal Reserve, excess savings for the bottom income quartile decreased by 25% between the first and second quarters of this year. That's the biggest drop of any income group and illustrates the degree to which these households are dipping into their savings. Plus, research by Liberty Street Economics looked at credit card balances in different ZIP codes and also showed that lower-income credit card holders now owe more than they did before the pandemic.

3. It's harder reduce costs if you're already buying the lowest priced goods

There's a lot of advice out there on how to cut costs. For example, you might switch to store brand products or find ways to reduce food waste. But if you were already doing those things, it's much harder to beat inflation. Plus, it's also more difficult to buy in bulk if you don't have extra money to pay for things upfront.

Another issue is the huge spikes in transport costs. This can make it harder for some families to travel to lower-cost stores and score better discounts. All in all, households that bring in less money have less flexibility when it comes to rejigging their budget and absorbing higher living costs.

Will inflation continue in 2023?

The good news is that inflation seems to be slowing, which means that prices might stop rising as quickly next year. However, prices are still high. And just because we can see the light at the end of the tunnel, it doesn't mean we're there yet. In the meantime, it's the people at the lower end of the wage spectrum who continue to be hardest hit.

The looming specter of a recession is another concern. One of the best ways to protect your household against economic downturn is to have an emergency fund containing three to six months' worth of living expenses. It makes it easier to handle job loss or other financial knocks. The Federal Reserve data suggests that lower-income households are already dipping into their savings, which could make it difficult to handle the impact of a recession.