How inflation affects poverty & inequality

Inflation rate in 2022

The Inflation index is designed to measure the price increases associated with a number of daily goods, including bread, milk, fresh vegetables, meat, rice, cereal, pasta, and other household items. In 2022, inflation has hit a record high over the past 4 decades, and at the fastest pace since 1982, in both developing and developed countries. High inflation is due to the slow economic growth after the COVID-19 disturbance, as well as the impact of Russia’s invasion of Ukraine.

Globally, inflation is predicted to be worse in developing economies, where price increases are projected to reach 8.7 percent on average over the course of this year. Among them are Venezuela, Sudan, Zimbabwe, Turkey, Yemen, Argentina, and elsewhere. In developed nations, this number was put at 5.7 percent by the IMF, followed by 6.2 percent in the United States and 3.6 percent in the EU.

Inflation and Poverty Line

Inevitably, with the price increase of daily goods, low-income families have to spend more of their income to stay at the same standard as they were, otherwise, they have to cut off their daily usage to save some money but a lower quality of life. In 2017, there were 700 million people living in extreme poverty with less than $2.15 a day globally, up from the previous poverty line of $1.90. According to the UN, 71 million more people have fallen into poverty because of spiking food and energy prices, and the rate of poverty is rising as quickly as the inflation rate.

Overall, there are over 5 billion people living in poverty, which is almost 70% of the world’s population, and the high inflation effect is felt deeply by those already at the lowest poverty line, particularly among those countries that are hit hardest. Additionally, 2.3 billion people are facing difficulties in feeding themselves as world hunger rises.

In developed countries, such as the United States, where inflation growth passes wage growth, low-income families have to spend more than 40% of their income on food, rent, and utilities. In developing countries, like Ghana, where the daily minimum wage is just $1.80 a day, people are struggling under the weight of inflation.

Inflation and Inequality

Inflation is high in both developed and developing countries, as well as in low-income and high-income families, but Jacob calculated that inflation was 7.2% for the lowest-income households, while for the highest-income families, the rate of change was 6.6%. The gap continues to grow at 0.6 percent.

As we can see in the chart above, low-income families tend to spend most of their income on necessities, while high-income families only spend nearly 20%, which indicates the difference when inflation hits both groups. This gap is expected to grow with the recession and economic uncertainty, and was higher at 1% during the recession of 2008–2009.

What next?

Governments play a big role in combating high inflation in both the short and long term, including monetary subsidies, price control, tax reduction, supply-chain deregulation, and other measures to reduce the cost of living. History always repeats itself, and we should learn from those lessons and make better decisions as a whole, and individually.

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Originally published at http://soinnoinsight.wordpress.com on August 10, 2022.