L_<:,. 2‘-us’/3 ;£Ptr1=# —77-253 E’ ....:f- U P :2. ER Report No. 79-258 E 315 -°”}§73’ INFLATION AND THE FAMILY BUDGET Brian Cashell Economic Analyst Economics Division December 17, 1979 December 19, 1079 J HG 2129 11.9. CONGRESSIONAL RESEARCH SERVICE UBRARY(M CONGRESS: The Congressional Research Service works exclusively for the Congress, conducting research, analyzing legislation, and providing information at the request of Committees, Mem- bers and their staffs. The Service makes such research available, without partisan A bias, in many forms including studies, reports, compilations, digests, and background briefings. Upon request, the CRS assists Committees in analyzing legislative proposals and issues, and in assessing the possible effects of these proposals and their alternatives. The Service’s senior specialists and sub- ject analysts are also available for personal consultations in their respective fields of expertise. ABSTRACT This paper uses the Labor Department's urban family budget concept to show how expenditures have increased for a carefully defined family trying to maintain a constant standard of living. Specific items in the budget, including energy costs, are examined to see how their shares of the total budget have changed. INFLATION AND THE FAMILY BUDGET There are several indexes that are widely used to illustrate price levels. Examples include the Consumer Price Index and various implicit price deflators. These measures have some limitations in showing the impact of inflation on the family budget. A useful tool in assessing the impact of inflation on the family budget is the Urban Family Budget, which is constructed annually by the Bureau of Labor Statistics. This paper examines the impact of inflation by using the Urban Family Budget concept to show changes in the cost of maintaining a constant standard of living. First developed in the 19403, the Urban Family Budget was used in appraising income tax exemptions. The intermediate level budget was designed to illustrate a ' ‘modest but adequate" standard of living. Today, three different budget levels are calculated--lower, intermediate and higher levels. All three are assumed to include average household inventories of items such as clothing, furniture and major appliances. Food costs are based on three plans developed in 1964 by the Department of Agriculture. These plans are designed to meet the nutrition standards of the National Academy of Sciences. A family living at the intermediate budget level is defined as having satisfied the basicneeds for food, shelter and-clothing and CRS-2 as being willing to buy either better quality items, or greater quan- tities of certain goods and services. At the lower budget level these basic needs have not yet been satisfied, and at the higher level they have been exceeded. Table 1 shows the most recent family budgets for the year 1978. TABLE 1. 1978 urban family budgets required to maintain a constant standard of living (current dollars) Lower Intermediate Higher Total budget $11,546 $18,622 $27,420 Total family consumption 9,391 14,000 19,225 Food 3,574 4,609 5,806 Housing 2,233 4,182 6,345 Transportation 856 1,572 2,043 Clothing 1 847 1,209 1,768 Personal care 301 403 570 Medical care 1,065 1,070 1,116 Other family consumption 515 956 1,578 All items 502 810 1,365 Social security and disability 719 1,073 1,091 Personal income taxes 935 2,738 5,739 , Each budget represents costs to a carefully defined urban family of four. The family consists of a 38-year old husband working full time, a wife who does not work outside the home, a son aged 13 and an 8-year old daughter. It is assumed that after 15 years of married life the family is well established and the husband is an established worker. Until these budgets are updated, using the 1972-1973 Survey of Consumeri Expenditures, they will continue to reflect a life style similar to those of the early 1960s. CRS-3 Housing costs of the lower budget level include expenditures for rental units as well as expenditures for utilities and insurance. other two levels reflect homeowner costs for a house purchased six years ago, and includes property taxes, insurance, repairs, utilities and mortgage payments. The Other family consumption expenditures represent non-necessity items such as tobacco products, alcoholic beverages, re- creation and education. An examination of these budgets over time shows how inflation has altered the structure of the family budget. In addition, such an exam- ination allows a comparison of (a) the increased cost of the family budget required for maintaining a constant standard of living and (b) increases in the rate of inflation as measured by the Consumer Price Index. Tables II and III give a percentage breakdown of the lower and intermediate TABLE II. Percentage breakdown of intermediate family budget 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 Food 22.7 23.0 23.1 23.3 25.2 24.8 25.0 23.8 24.0 24.8 Housing 23.3 23.4 24.0 24.5 23.0 22.6 23.1 23.7 23.5 22.5 Transportaton 9.3 8.6 8.8 8.5 8.0 8.2 8.3 8.6 8.6 8.4 Clothing & personal care 1 . 1 . 1 . 1 . 1 . . . . . . 0 9 0 7 0 9 0 6 0 1 9 7 9 4 9 2 9 1 Medical care 5 4 5 3 5 6 5 5 5 3 5 2 5 4 5 5 5 8 Other consumption 6 0 6 0 6 2 6 1 5 7 5 5 5 4 5 4 5 3 Total consumption 77.6 76.9 78.6 78.6 77.3 75.9’ 76.5 76.2 76.2 Other costs N A 5 1 5 1 5 0 4 8 4 6 4 6 4 5 4 5 Social Security N A 3 2 3 8 4 2 5 1 5 4 5 4 5 5 5 6 Personal taxes 13 4 4 4 2 5 2 0 2 7 4 0 3 4 3 8 3 7 CRS-4 TABLE III. Percentage breakdown of lower family budget 1969 1970 1971 1972 1973‘ 1974 1975 1976 1977 1978 Food 27.1 27.4 27.2 27.9 29.8 30.0 30.8 29.9 30.4 31.0 Housing 21.1 20.5 21.0 21.0 19.9 19.1 19.4 19.6 19.9 19.3 Transportation 7.4 7.3 7.4 7.4 6.9 7.0 7.3 7.6 7.7 7.4 Clothing & personal care 11.9 11.6 11.8 11.7 11.0 10.8 10.6 410.6 10. 9.9 Medical care 8 2 8.1 8.4 8.5 8.1 8 0 8 5 8.9 9. 9.2 Other consumption 4.9 5.0 5.1 5.1 4.8 4.6 4.7 4.7 4. 4.5 Total consumption 80.5 79 8 81 0 81.6 80.4 79 6 81.3 81.3 82. 81.3 Other costs N.A. 4.9 4.9 4.9 4.7 4.5 4.5 4.5 4. 4.3 Social Security N.A. 5.0 5.4 5.4 6.0 6.0 6.0 6.0 6. 6.2 Personal taxes 9.4 10.3 8.7 8.1 8 8 9.9 8.1 8.2 6. 8.1 budget levels. In the areas where rising energy costs would be expected to have significant effects (housing, food and transportation), only minor changes in budget expenditure patterns seem to have taken place (see Chart I). In the lower level budget the proportion of food expen- ditures in the family budget has increased from 30 percent in 1974 to 31 percent in 1978. By contrast, the share of medical care in the family budget of lower income persons has increased from 8 percent in 1974 to 9.2 percent in 1978. The share of the lower family budget used for housing appears to have declined overall, although some increases have been observed since 1974. Of particular interest is the share of the family budget spent on energy. While this is, to some extent, reflected in the Housing, Transportation and Food sectors, it is instructive to examine energy specifically. Because a separate component for energy is not available from the Urban Family Budget, we examine the energy component of Personal Consumption Expenditures as provided in the National Income and Product CRS*5 Chart I 2.22.8 3 ES: .828 5.38am .u.§.8§.8 .5 B usage; was? 32 R? d 3.2 mum. K2 mt: Nhm — K2 — d _ _ . . # 22 $2 _ O C O O O O Eoozm 4<._.O._. mI._. .6 pzuommm O I O I O O O ozmaox moo... Begum. .fi._>m._ E<_B2mE.z_ m:.:. .._O mmm:.:ozmaxm_ mo}: o.NN m.NN 3.,“ menu o.§ new 93 mam cam CRS-6 Accounts. Table IV and Chart II show that while energy expenditures as a percent of Disposable Personal Income has increased, the rise is not spectacular. Following 1973, the year in which oil prices began their dramatic rise, the share of energy expenditures in the consumer's budget has increased at a modest rate. TABLE IV. Energy expenditures and disposable personal income Total disposable Energy-related Energy expenditures Year personal income expenditures 1/ as a percent of total (billions of $) (billions of §) 1969 S 630.4 $ 39.8 6.3 1970 685.9 42.9 6.3 1971 742.8 45.9 6.2 1972 801.3 50.1 6.3 1973 901.7 56.1 6.2 1974 984.6 70.1 7.1 1975 1,086.7 79.0 7.3 1976 1,184.4 88.0 7.4 1977 1,303.0 98.0 7.5 1978 1,451.2 108.6 7.5 _1/ Gasoline and oil plus fuel oil and coal plus electricity and gas. Source: Economic Report of the President, January, 1979; Table B-13, p. 198; Table B-21, p. 208. Table V and Chart III present a comparison of year to year percent changes required to maintain a constant standard of living among the three budget levels. These estimates are compared to the Consumer Price Index and median family income. It appears from these data that families with larger budgets require a faster rate of increase in income to main- tain their standard of living. ,0ne reason for this difference is that between 1969 and 1978 personal taxes for the higher level budget increased CRS-7 127 percent, while the increase for the lower level budget was only 51 percent. Comparing consumption expenditures over the same period, it is found that the increases for the higher and lower level budgets were about the same, 78 percent. Food costs also rose at approximately the same rate, 101 percent for the lower budget and 105 percent for the higher budget. There was a major difference in the increase for housing, however; 61 percent for the lower budget and 22 percent for the higher budget. TABLE V. A comparison of growth rates for the urban family budgets, median family income, and the CPI CPI Median Family (Annual Lower Intermediate Higher Income average) Year $ Z change $ A Z change $ Z change $ Z change Index Z change 1969 6,567 10,077 14,589 9,586 109.8 1970 6,960 6.0 10,664 5.8 15,511 6.3 9,867 2.9 116.3 5.9 1971 7,214 3.6 10,971 2.9 15,905 2.5 10,285 7.5 121.3 4.3 1972 7,386 2.4 11,446 4.3 16,558 4.1 11,116 8.1 125.3 3.3 1973 8,181 10.8 12,626 10.3 18,201 9.9 12,051 8.4 133.1 6.2 1974 9,198 12.4 14,333 13.5 20,777 14.2 12,901 7.1 147.7 11.0 1975 9,588 4.2 15,318 6.9 22,294 7.3 13,719 6.3 161.2 9.1 1976 10,041 4.7 16,236 6.0 23,759 6.5 14,958 9.0 170.5 5.8 1977 10,481 4.4 17,106 5.4 125,202 6.1 16,009 7.0 181.5 6.5 1978 11,546 10.2 18,622 8.9 27,420 8.8 17,640 10.2 195.4 7.7 Average percent change 6.52 7.11 7.30 7.39 6.64 For the period 1969 to 1978, families characterized by the higher budget required an average budget increase of 7.3 percent per annum compared with 6.52 percent per annum for families with lower budgets in order to maintain a constant standard of living. This point has been CRS- 8 Chart 2 uoocucoo mo >..O..£.._ .oo.>..om sfiooaom _o:o_uo8ucoo 2.: an vfluafim mm mum. mum. omm_ mum. ¢nmr mum. %Nhmw _nm_ onm_ mam, q _ d _ _ _ A H pzuomma m:2ooz_ m._m mum. Rm. mum? _ mum. K2 mum; NRO... :.m— cum. . w A A _ _ _ . . . .\xx, \x..\ 6,, \\\\\\ .// ..... . . . . . . . . . . . s\\\ . . wlrl ..\!lll!l .Q\ // ..\\\\s\.l.a..... fill]. III. . svs X \ II II . \ A :II:immm, vs mnuxx . w», \m\ \. /, mx .. \ . ,2. § ‘ .. 4, .¢ .. .9, ..%\ . xx \\x. I a ss\. . N - cu.//\\s\s /\ .. m m:o_>umn_ 29: mOZu_:>_<..._ 9 NF .3 3 CRS-10 made before, notably by Joseph Minarik of the Brookings Institution, who writes, regarding the effects of inflation: Reduced real income is found in only a few low income classes, leaving these households for the most part slightly better off. Middle income households stay even. At upper incomes, the results are superficially different but the essence is the same; real income losses are substantial. Curves for an intermediate year (not reprow duced here) suggest that a partial recovery of real income in the upper groups follows the first year, but that the underadjustment of income taxes then sends real incomes into a renewed decline. Thus continued real income losses are in prospect for the rich. 1/ It should be noted, however, that no attempt is made here to show the differences that these three budget levels have in coping with inflation. It can also be observed that in the period of accelerating consumer price rises (1974-1978), the cost of maintaining a standard of living is rising more rapidly than is the rate of inflation as measured by CPI (see Table V). This is, in general, the case for the intermediate and higher budget levels, with a few exceptions. The converse alsoi appears to be true; while consumer price rises are decelerating the cost of maintaining a standard of living decelerates more rapidly. Although the urban family budgets include taxes, social security payments and other non-consumption costs which are not included in the CPI, it is helpful to illustrate the relationship that does exist bem tween these items. The CPI is constructed from a "market basket" of goods and services, it represents consumption costs to an "average" consumer, and does not include taxes, insurance payments, or gifts and contributions. The family budget, on the other hand, defines the dollar 1/ Minarik, Joseph. Who wins, who loses from inflation? The Brookings Bulletin, v. 15, summer 1978: 6-10. CRS-11 expenditures required of a very specific family unit trying to maintain its standard of living. The family budgets are updated using appropriate consumer price indexes. Thus, we can see how inflation is affecting different sectors of the budget. The urban family budget is also compiled to demonstrate how living costs vary from area to area. Budgets for 40 metropolitan areas in four regions, as well as non-metropolitan areas in each region, are computed at each of the three budget levels. These budgets are adjusted to reflect somewhat different consumption patterns due to weather, regional differences and price differences (see Table VI for the 1978 regional breakdown of the intermediate level budget). Finally, a reason given for the development of the lower level budget was to evaluate needs of families at the lower income levels in establishing criteria for public assistance programs such as housing and energy-related Federal grants. Since regional cost differences are available, the lower budget level may be useful in identifying candi- dates for public assistance on the basis of the cost of maintaining a basic standard of living rather than on the basis of income. dd CRS-12 .mmmmu mmum moaammmmomxzonmum mamummommmm was mom mmuzmmu uuamm Hmu umumm amammaamu mmma mamou.mmm. .mmmmm zmmmm mmmma mom. 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