With the war in Ukraine, inflation has returned, and it is wreaking havoc. Surging economic activity, supply-chain disruptions, and soaring commodity prices came together in 2022 to push global inflation to its highest level since 2008. As a result, food and fuel prices spiked since Russia and Ukraine are big exporters of many commodities including gas, oil, coal, wheat, fertilizers, etc.
Among emerging market and developing economies, inflation reached its highest level since 2011. For lower-income countries, disruption to supplies as well as higher prices could cause increased hunger and food insecurity. And disruption to supply chains could broadly intensify inflation pressures.
The impact of inflation on the poor
Inflation places a very high burden on poor households because they are largely hand-to-mouth consumers. Compared to richer families, even small increases in commodity prices have strong implications on their consumption. Moreover, uncontrolled inflation generates poverty traps. It forces low-income households to avoid starvation by eating lower-quality food, potentially affecting their children’s cognitive development.
The poor are more exposed to inflation because they lack the means to preserve their purchasing power. Their access to financial markets is limited or nonexistent, so they cannot use credit to boost their consumption. Even if they have access to financial credit lines, they depend on debt, usually from informal markets, to meet basic needs.
In addition, their income usually comes from the informal sector, so they are not covered by public or private institutional arrangements that protect employees from price increases. They do not have the capacity to save, meaning they can neither use their money to maintain their consumption habits nor buy indexed financial instruments to conserve the value of their assets.
High-income and middle-income households, on the other hand, have some access to these tools and ever greater access to them as their income increases. Thus, efforts to reign in inflation are a fight not only against the vulnerabilities of the poor but also against inequality.
Composition of financial assets
Poorer households often lack access to financial products that can protect them against inflation, because these products can have upfront or ongoing costs and can therefore be unaffordable. In the United States, for example, almost all households have a transaction or checking account at a financial institution. However, far fewer households have savings or investment products.
Research has also shown a widening inflation gap between the rich and the poor, which is known by economists as inflation inequality. This gap typically comes down to the spending habits of people in each income group. In times of economic uncertainty and recession, most households tend to hold back on buying luxury goods. But by and large, people can’t cut down on basic necessities such as groceries and heating, although wealthier consumers are better placed to stock up on these necessities when prices are cheap.
This shift in spending away from luxury items like vacations and new cars, and toward necessities, increases inflation for poorer families more than for richer ones. This is because lower-income households dedicate a higher percentage of their income to necessities.
