Is Inflation Hitting Your Budget Harder Than Official Figures Show? Blame 'Cheapflation'

Key Takeaways

• New research shows household budgets for lower-income families are hurt more by inflation because of "cheapflation."
• In times of high inflation, prices rise faster for cheaper versions of products than for their luxury brand counterparts.
• "Cheapflation" could help explain why inflation sometimes seems more punishing than official statistics suggest.

If inflation seems far higher to you than the official statistics show, it could be because the data doesn't account for a phenomenon called "cheapflation."

Although economists have long known that inflation tends to take a bigger bite out of working-class household finances compared to the well-off, they may have underestimated the size of that gap by as much as 90%.1 That’s according to research published this week by the National Bureau of Economic Research, carried out by Kunal Sangani, a professor of economics at Northwestern University.

You've probably experienced cheapflation even if you've never heard of it—it's when prices rise faster for budget versions of products than they do for luxury brands. It means that in times of high inflation, bargain hunters experience more sticker shock than those buying from the top shelf.

"There was a sense that people had that the official inflation numbers that were being reported by the BLS ... that those inflation figures weren't representing the experiences they were having when they're going to the grocery store and experiencing much higher prices than the 5% or 10% that was often being cited in official numbers," Sangani said. "For lower-income customers, the data show that that's clearly true."

What This Means For The Economy

The "cheapflation" phenomenon could mean lower-income households are under more cost-of-living pressure than official statistics capture.

The difference can be larger than you might think, especially during times of high inflation, such as the aftermath of the pandemic.

Take coffee, for example. Sangani looked at price data from market research firm NielsenIQ and found that if you bought a more affordable brand like Folgers or Maxwell House, you experienced steeper price hikes than if you bought something fancier like Pete's or Starbucks. Between 2020 and 2023, prices for discount coffee brands rose 36.4% versus 9.7% for the premium stuff, according to data Sangani provided to Investopedia.

The differences add up at checkout. Over that time period, prices for the cheapest groceries rose 51.5%, while the higher-end versions only went up only 16.3%.

To be sure, wealthier people do not exclusively buy the most expensive brands, nor do those with lower incomes stick only to the bargain bins. Still, the bottom 20% of earners saw their grocery bills rise 27.3% in the post-pandemic period, versus a 24.9% increase for the top 20% according to Sangani's data.

Why Cheapflation Happens

The reason for the difference is straightforward, Sangani's research showed: companies tend to pass their own cost increases through to their prices.

For example, if the price of coffee beans rises by 20 cents a pound, Folgers and Starbucks will likely raise their prices by about 20 cents a pound. That 20 cents is a higher percentage increase for the lower-priced Folgers, however.

Sangani's research, using prices for individual products, found much larger differences in inflation rates between lower and higher-income households than previous analyses relying on official data from the Bureau of Labor Statistics.

The BLS combines data for lower- and higher-end products in the same category to give an idea of the overall rate of price increases, so it misses the cheapflation factor.

To get an idea of how inflation varies across income groups, the bureau accounts for how much people spend on different items depending on income—for example, food and gasoline are a bigger portion of your budget the lower your income.2

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Cheapflation, a term coined in 2024 by Alberto Cavallo and Oleksiy Kryvtsov, adds more detail to that kind of analysis. It could help explain why, in surveys, people with lower incomes tend to be more pessimistic about inflation than their wealthier counterparts.3

"My impression is that people's trust in statistics produced by the government seems to have wavered a little bit recently, and one small part of it might be that those statistics aren't capturing the reality that they're facing, especially if they're at the low-income kind of distribution," he said.

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1. National Bureau of Economic Research. "Cheapflation Cycles."
2. Bureau of Labor Statistics. "R-CPI-I and R-C-CPI-I Homepage."
3. Federal Reserve Bank of New York. "Survey of Consumer Expectations."

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