UBS published today the latest Global Economic Perspectives entitled 'Unequal Economics" which looks at the rise in income inequality across the main industrial economies.
The report highlights how income inequality has grown globally over the last 15 years. Inflation, the report argues, has compounded inequality. Essential goods including food and energy, which have risen in price, account for a disproportionately high percentage of the spending of lower income groups. Conversely, manufactured goods such as cars and electronics, which make up a large part of the spending of higher income groups, have fallen in price.

The trend is particularly pronounced in the U.S. where the report asserts that low income groups have arguably been experiencing a severe "recession" for all of this decade while the rest of society has seen strong economic growth. Financial analysis based on aggregate data suggests that real household disposable incomes in the United States rose around 7.3% between 1997 and 2004ⁱ. However, the real income growth for the lowest income consumers in the U.S. fell over 12.5% over the period. The aggregate number is therefore, the author argues, misleading. For the first time, the report also provides evidence that for some economies, U.S and Canada, the middle classes are being affected by the strains of this increasing income inequality.
The report goes on to describe the implications of growing income inequality for consumption patterns stating that markets may not currently be distinguishing sufficiently between aggregate and specific consumer trends within sectors. In addition, the implications of income inequality for consumer credit need to be looked at carefully. The average household balance sheet may not be relevant if one group in society have all the assets and no liabilities, and another group have all the liabilities but no assets. The aggregate balance sheet will look healthy but in reality one group have a strong looking balance sheet, while another group face a bleak situation. When considered in aggregate therefore, household balance sheets are an increasingly unsatisfactory economic indicator.

The implications for real returns on financial investments, which have traditionally used the aggregate rate of inflation as the discount rate, are also discussed. If, as the report suggests, inflation inequality has risen, then using the average rate of inflation will lead to misstated real returns. Wealthy investors, who the report explains have lower than average rates of inflation, may be realising higher real returns than is commonly supposed. However, investors such as charities who invest to benefit low income groups may be losing out. This is due to lower income groups experiencing higher than average rates of inflation. These investors require higher real rates of return in order to meet their goals and avoid making a loss, so the aggregate rate of inflation may be a dangerously misleading number.

The report concludes that if current trends persist, then the pressures on fiscal and monetary policy are also likely to grow. The possibility of policy change cannot be ignored in the coming years, particularly if the more politically enfranchised middle classes become involved in the debate.

The full report can be obtained by contacting Richard Morton, Media Relations, London, Richard.Morton@ubs.com or your local media relations office.