Inflation turns poverty and inequality – hits low-income households the hardest

With the war in Ukraine, matters are going quickly from bad to horrid. Food and fuel prices have spiked, as Russia and Ukraine are big exporters of many commodities including gas, oil, coal, fertilizers, wheat, corn, and seed oil. Several economies in Europe and Central Asia, the Middle East, and Africa are almost entirely dependent on Russia and Ukraine for wheat imports. 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. For many households across the world, rising inflation poses a significant challenge. Higher prices can erode the value of real wages and savings, leaving households poorer. But these effects are not felt equally: Low- and middle-income households tend to be more vulnerable to high inflation than wealthier households. That reflects the composition of their income, assets, and consumption baskets. Inflation may affect the very poorest households living below the global poverty line less directly, however. That’s because the poorest households have minimal wage incomes or assets and tend to rely on nonmonetary income, such as subsistence farming or barter, which may be less vulnerable to inflation. In advanced economies, low- and middle-income households tend to rely more heavily on wage income and transfer payments than wealthier households (Figure 2). Price inflation often outstrips growth in wages and transfers, while self-employment income and investment income may be more likely to keep pace with inflation. As such, inflation can reduce the incomes of poorer households relative to those of the richest. Among emerging market and developing economies, the picture is similar. In Brazil, for example, self-employment and investment income account for a larger share of income in high-income households than in low- and middle-income households. However, the very poorest households also rely on nonmonetary income. Poorer households often lack access to financial products that can protect them against inflation, because these products can have upfront or ongoing costs and 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. The distribution, moreover, is highly skewed: The wealthiest quartile of U.S. households is five times as likely as the poorest to hold certificates of deposit, six times as likely to hold savings bonds, and 12 times more likely to hold investment funds. High inflation, in short, tends to worsen inequality or poverty because it hits income and savings harder for poorer or middle-income households than for wealthy households. Households that have recently escaped poverty could be pushed back into it by rising inflation.