Broda & Romalis in FT

Christian Broda writes in the FT on his joint work with John Romalis.

Inflation differentials between the rich and poor dramatically change our view of the evolution of inequality in the US. Inflation of the richest 10 per cent of US households has been 6 percentage points higher than that of the poorest 10 per cent in the period 1994-2005. This means that real inequality in the US, if measured correctly, has been roughly unchanged.

The reason is just as dramatic as the result. Why has inflation for the poor been lower than that for the rich? In large part it is because of China and Wal-Mart.

Poor families in America spend a larger share of their income on goods whose prices are directly affected by trade – such as clothing and food – than wealthier families. By contrast, the higher a person’s income, the more they spend on services, which are less subject to competition from abroad. Since 1994 the price of goods in the US has risen much less than the price of services – and, yes, this includes the recent surge in food prices. Focusing on the past few quarters of high relative food prices misses the fact that the main trend we have observed for decades is exactly the opposite.

This trend can partly be explained by China. Prices of consumer goods in US stores have fallen most heavily in sectors where the Chinese presence has increased most. In canned seafood or cotton shirts, for example, where China’s exports to the rest of the world have increased dramatically this decade, inflation has been negative. In sectors where there is no Chinese presence, inflation has been more than 20 per cent. Moreover, as China produces goods of relatively low quality, sectors that have a strong Chinese presence are disproportionately consumed by the poor.

The expansion of superstores – such as Wal-Mart and Target – has also played an important role in accounting for the inflation differentials between rich and poor. Superstores sell the same products as traditional shops but at much lower prices. Today the poor buy roughly twice as much of their non-durable goods in these stores as the rich do. Poor consumers have therefore been the biggest beneficiaries of Wal-Mart’s coming to a town.

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