Via Naked Capitalism comes an explanation of what income inequality looks like in the US. It stands in contrast to the Bloomberg article pointed to by Yves in her introduction. I pulled the quotes with a non-economic person in mind.
THE WOLF STREET REPORT transcript of podcast by Wolf Richter.
Subprime doesn’t mean poor or uneducated. Subprime means having a credit score below 620…
Aggressive subprime lending went into overdrive starting in 2014, and private equity firms piled into it, and smaller banks went after it, and it’s now coming home to roost . . .
This includes healthcare costs, and it includes food costs, and apartment rentals, and cars have gotten a lot more expensive, and the like. But cars and apartments and cellphones have gotten a lot better too, and these quality improvements are added to the price. Think of the move over the years from a four-speed automatic transmission to an eight-speed automatic, or from two airbags to 10 airbags, or from a basic cellphone to a smartphone . . .But for figuring the inflation measure of the Consumer Price Index, the costs of these quality improvements are removed from the index. This is the principle of hedonic quality adjustments . . .
So the CPI for new cars has been essentially flat since 1995, meaning no inflation for 20+ years, when in reality, the actual prices have jumped. For example, the price of a new Toyota Camry jumped by 25% between 1995 and 2019.With used cars, it’s even worse. The CPI for used cars has declined by 11% since 1995. But actual used car prices have soared since then.This goes for many other products and services across the spectrum. And then consumers, even when their income rises faster than inflation as measured by CPI, run into this problem where their income no longer suffices to buy these goods and services, including used cars and health care or housing, because actual prices of these goods and services have far outpaced both inflation as measured by CPI and wage increases.This goes increment by increment. What might have worked last year, suddenly doesn’t work anymore this year. These consumers with jobs, that have been living from paycheck to paycheck, suddenly find themselves confronted with a 20% increase in health insurance premium or a 10% increase in rent, or both.And suddenly, their whole fragile equation doesn’t compute anymore, from one day to the next. And they fall behind. As more consumers are getting caught up in it, subprime starts to blow out, even in what are considered the good times because actual prices have outrun these people’s incomes, and they’re confronted with it, such as with rent or healthcare, from one day to the next.