Total household spending accounts for nearly 70 percent of U.S. gross domestic product, suggesting that changes in the spending patterns of households or the age composition of the U.S. population may have macroeconomic implications. Kansas City Fed Senior Economist Jun Nie and Research Associate Akshat S. Gautam conducted a comprehensive study of possible differences in the cost of living across age groups. The results of that study, published in January 2020, suggest that older households in general have faced slightly higher inflation rates than younger households over the last four decades, but the gap has narrowed significantly.
Which methods were used to conduct this study?To properly measure the difference in the cost of living between different households, we need to combine detailed spending data with price data, because headline inflation statistics may mask differences in the cost of living faced by different age groups. In particular, we used the consumer Expenditure Survey from the Bureau of Labor Statistics (BLS), the most comprehensive household-level expenditure data set in the United States. This survey is extensively used by researchers and policymakers to measure the spending patterns of households at different ages. After exploring these differences across age groups, we then combined the expenditure data with price data from the BLS to examine differences in the cost of living faced by different age groups. Defining categories in a consistent way allowed us to construct a data set that spanned from 1983 to 2018 and contained expenditure information for roughly 7,000 households for each year.
Why have inflation rates been higher for older households?This is mainly because older households spend relatively more on health-related and medical expenses, which show higher inflation rates, than expenses such as transportation, communication and leisure, which show relatively lower inflation rates, on which younger households spend relatively more.
How has the inflation gap changed over the years?We found that the inflation gap between older and younger households has narrowed significantly over the last four decades as the inflation rate of health-related expenses has declined. The difference in spending patterns of older and younger households have remained relatively stable over time and contributed little to the declining inflation gap.
In addition, we found that the shares of household spending on health, rent, and education and communication have risen for all age groups over the last 40 years, while the shares of spending on household goods and services and on transportation and leisure have declined.