Consumption patterns vary across income groups, says Cleveland Fed researcher
Federal Reserve Bank of Cleveland vice president and senior regional officer LaVaughn Henry examines changes in consumption patterns for different income classes over the past three decades. He finds that, for lower- and middle-income groups, the share of total inflation-adjusted (real) consumption going to purchase necessities has contracted since 1984, while the share going to purchase luxuries has remained fairly constant or slightly increased. For the highest-income quintile, however, there has been growth in the relative consumption of luxuries.
Henry developed a metric for distinguishing luxuries and necessities in consumption data produced by the Bureau of Economic Analysis. He defines a “luxury” as a good or service that is consumed in greater proportions as a person’s income increases, and a “necessity” as a good or service whose consumption is proportionately less as a person’s income increases.
According to Henry, consumers have, in general, significantly increased their consumption of luxuries over the last 30 years as their real income levels increased. Recently, however, this pattern reversed. Since 2007, the year in which the Great Recession started, the consumption of luxuries declined and only recently began to stabilize, in 2012. The consumption of necessities began to rise in 2007 and slowed in 2012.
Henry says that while consumption has gradually been rebounding from the recession, current trends in both income growth and income inequality are altering the mix of goods and services that consumers are purchasing. Henry says there may be useful information in the disaggregated patterns for macroeconomic models, which tend to focus on average income effects.
Henry also notes that all but the highest income quintile have seen their consumption of education decline significantly. To the extent that education continues to decline as a share of real consumption, it may exacerbate the income inequality trend of the coming years, says Henry, as increased education is one of the most reliable paths to increased income.
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
Doug Campbell, email@example.com, 513.455.4479