The cost of “excess inflation” in Hawaii

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By Daniela Bond-Smith, Steven Bond-Smith and Carl Bonham

The cost of living in Hawaii continues to rise. In March, the Urban Hawaii (Honolulu) Consumer Price Index (CPI) was 7.5% higher than it was one year ago, squeezing household budgets and   disproportionately impacting low-income households. Honolulu last saw an elevated inflation rate of 6.0% briefly in mid-2006, but otherwise inflation has not been over 7.5% since 1991. The recent surge stands in stark contrast to the inflation experience of recent years: between 2017 and 2020, Honolulu inflation averaged just 1.9%. If we take 1.9% to be the typical inflation rate for Honolulu, then the additional 5.6% inflation for the year ending in March can be thought of as “excess inflation.

Inflation creates budget pressures for households if it is not offset by proportionate increases in income. Inflation varies dramatically across different goods and services (e.g. food versus gasoline). And, the proportion of household income devoted to different goods can vary widely across income levels.  The result is that the cost of inflation can also vary widely across income groups. We estimate the differential impact of excess inflation on Honolulu households by analyzing the rise in the cost of household expenditures by income quintile. Each income quintile estimates the income earned by 1/5th of households ordered from lowest earning households in the first quintile to the top 1/5th of the income distribution.

To estimate expenditures by income quintile, we use responses to the US Bureau of Labor Statistics Consumer Expenditure Surveys (BLS-CE) from 2019 and 2020, weighted to be representative of the Hawaii population. Income quintiles are defined using income data for 2019 and 2020 from the US Census Bureau’s American Community Survey. CPI data was obtained from the US Bureau of Labor Statistics. While we do not have measures of consumer prices for the state as a whole, it is common to use the Honolulu CPI as a proxy for the prices consumers face across other islands as well. Assuming unchanged household expenditure baskets relative to 2019/20, in March 2021 dollars, the average household spent $61,530 per year (See Figure 1). The largest share of the average household budget went to housing and household utilities, 38% of expenditure or just over $23,000. Transportation was the third largest budget group, with a 15% share of average household spending. This includes the cost of gasoline which has seen a dramatic 39% increase over the past year, as well as new and used vehicles (up 14.1% combined), and private transportation (up 20%). Combined transportation costs rose by 18% on average. Despite the dramatic surge in gasoline prices, it represents just 3% of the typical household’s budget.

Figure 1: Average shares of expenditure for Honolulu households

Figure 1: Average shares of expenditure for Honolulu households

Source: UHERO calculations from responses to the Consumer Expenditure Surveys (BLS-CE).

Expenditure shares vary a lot by income quintile. The lowest income households, in the first quintile, earned less than $38,800 in 2020. These households spent 48% of their total expenditures on housing and household utilities. In contrast, the highest quintile earned more than $163,600 and allocated only 32% of their total spending to housing and household utilities. The second quintile earned between $38,800 and $70,000 per year in 2020, but spent a larger share of their budgets (17%) on transportation than any other quintile. Households in other income quintiles spent between 12.6% and 15.5% of their total spending on transportation.

If households in Honolulu on average purchased the same items in 2022 as they did in 2019 and 2020, then the excess inflation of 5.6% adds an average additional cost of $3,506 per household. The largest component of excess inflation for all income groups is transportation, accounting for between 41% and 48% of the additional cost of living (see Figure 2). While housing and utilities (including household energy costs) make up the largest share  of average household expenditure, excess inflation for housing expenses was only 3.3%, or a 20% share of the cost of excess inflation. Increasing food prices contributed the third highest share to the cost of excess inflation, especially for low-income households for whom food makes up one fifth of their budget, now costing an additional $393 per year.

In absolute terms, the total cost of excess inflation ranges from $1,763 for low-income households in the first quintile to $7,206 for high-income households in the fifth quintile. The dollar cost of excess inflation is greater for households in the second quintile ($3,463) compared to the third quintile ($3,334). This is largely due to a significantly greater share of expenditure on transportation.

Figure 2: Cost of excess inflation in Hawaii by quintile and component

Figure 2: Cost of excess inflation in Hawaii by quintile and component

Source: UHERO calculations from responses to the Consumer Expenditure Surveys (BLS-CE) and the American Community Survey.

We can think of the cost of excess inflation as if it were a tax on income by comparing it to annual household income. This additional “income tax” amounts to 8.7% for households in the lowest income quintile while it is substantially lower for households in the highest income quintile at 2.7% (See Figure 3). The surge in inflation over the past year is having a marked impact on Hawai’i households, and these costs are disproportionately borne by lower income households.

Figure 3: Excess inflation as a share of average 2020 income by quintile

Figure 3: Excess inflation as a share of average 2020 income by quintile

Source: UHERO calculations from responses to the Consumer Expenditure Surveys (BLS-CE) and the American Community Survey.

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1 thought on “The cost of “excess inflation” in Hawaii”

  1. Paul Brewbaker

    Nice breakdown and analogies. I reckon the “excess macro cost” of the (roughly) 5-6 percentage points of current Hawaii inflation is around 3-4 percentage points, and the “excess micro cost” is around 2 percentage points. Let’s call it 4 for macro, 2 for micro, and 2 well-anchored inflation expectations (the 1.9 percentage points), to keep it simple. Last fall, in fourth quarter 2021, the breakdown was closer to 2 percentage points each–macro and micro. One year ago (March 2021; you decompose March 2022) the breakdown was close to nil. I can’t attach a graphic but you get the picture. From total Hawaii inflation, 7 or 8 percentage points, extract Hawaii’s 1.9 percent steady-state inflation rate (the monetary policy goal; 2 is the number, and the number is 2). Then remove the difference between headline and core inflation rates, the micro piece. Those 2 percentage points or micro inflation were from supply-chain disruptions intensifying about a year ago (which lurk primarily in PPI data, just to be clear), and from rising energy and food costs–which are removed from the core. Energy and food are two of the three smoking guns in the March 2022 inflation stats. The third smoking gun is used cars, which is all about semiconductors, Trump’s Trade War and the Sudden Stop in investment in chip fabs, followed by the whiplash from covid. (Because of covid, good chips from not enough fabrication plants, half of which are on Taiwan, went into devices for working and educating remotely rather than into new motor vehicles, inventories of which rental car companies dumped simultaneously.) I know, the details are tedious but it matters when Hawaii’s rank inflation factors are: 1. energy; 2. used cars; 3. food. To the extent the 4 percentage points of Hawaii macro inflation are things which policy can mitigate, the Fed has got a slow-rolling start on a monetary policy response. Presumably the federal fiscal over-stimulus is unwinding in 2022. Perhaps one trillion dollars of the five trillion stimulus was superfluous, between CARES (Mar 2020), CAA (Dec 2020), and ARPA (Mar 2021). How quickly this burns off is unclear, especially in a state like Hawaii where the Ledge didn’t spend the money then, and now feels obligated to fly over the islands pushing its “surplus” out of helicopters, the opposite of helping bring down Hawaii inflation. Similarly, as we know from the 1970s, which the 2020s are not, monetary policy is ill-suited to managing the 2 percentage points of Hawaii excess inflation originating in aggregate supply. (Russia’s invasion of Ukraine so far has lasted longer than the Yom-Kippur War in 1973 and its oil embargo, and is more gnarly than the Iranian Revolution in 1979, both of which ARE parallels between those years and 2022–to be continued, sadly.) As far as your “inflation tax” burden goes, one bit of advice for households is hold off on that used car purchase for another year, or to try to remember when tempted to dine out that BA.2 is afoot and rising, nobody is masked, Blangiardi is mayor, and the people most likely to be guffawing heartily at the table next to you are more likely to be unvaxxed than those still tending to eat at home. Just saying. They think they’re shredders but they’re actually covid shedders. Inflation is a tax, but only if you don’t make the substitutions which the Boskin Commission sought to parse from CPI measurement back in the 1990s, the last time Hawaii inflation was this high–8.9 percent in first half 1991, contemporaneous to Operation Desert Storm. There’s a reason the books were called “The Price of Paradise” (although that was mostly about housing at that time).

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