What is Inflation?
Inflation is when goods and services increase in price over time. If there's a shortage of the raw materials used to produce goods, that can increase inflation. Likewise, increased demand for products and services can also trigger inflation. Economists also report that a higher price of oil can majorly affect inflation rates because it is used to make and deliver so many goods.
What is the Relationship Between Poverty and Inflation?
Inflation intensifies the problem of poverty. For people in lower-income households who already live hand-to-mouth, paying more for essential goods like gas and food can be devastating. Inflation also lowers the real minimum-wage around the world, meaning it decreases the value of minimum wage and lowers the standard of living even more for those who rely on it.
Why Does Inflation Hurt the Poor More Than Others?
People in high-income households can typically weather rising inflation. But those in low-income households lack control over their purchasing power. They often don't work jobs where wages are adjusted to compensate for inflation. Those with the lowest income can't rely on credit when cash flow is tight. And they live hand-to-mouth, so they don't have savings to help them weather hard times.
And consumer prices often increase more for basic needs than for luxury items. Low-income earners spend a greater portion of their budget on essentials than their counterparts. As a result, low-income families' budgets will feel a greater strain than higher-income earners when costs rise for essentials like food and gas. For example, food costs are 17% of consumer spending in advanced economies but 40% in sub-Saharan Africa1. This disproportionate impact on people in poverty is called inflation inequality.
For many in poverty, food insecurity is already debilitating. The UN reported that in 2021, food prices shot up by 22%, reaching their highest level in a decade2. This is catastrophic for many in low-income countries. The Food and Agriculture Organization (FAO) and World Food Programme warned that continued high food prices could undercut food access in many countries, including Afghanistan, the Bolivarian Republic of Venezuela, Haiti, Liberia, Nigeria and Sierra Leone.
How Does Inflation Impact Real Minimum Wages Around the World?
Studies show that inflation's worst effect on poverty is how it impacts real wages. A World Bank survey of 38 countries found that high inflation tends to lower the real minimum wage, while also increasing poverty3. If minimum wages increase less than the price of goods consumed by wage earners, a workers' real income will decline. According to study results, real wages fall by 14 percent when inflation doubles3.
Think of it this way: Nominal wages are how we typically think of income - it's the amount of money we get in our paycheck. Real wages are represented by the amount of goods and services we can buy with that money. When inflation increases the prices of goods and services but the nominal wage stays the same, people can buy fewer things with the same amount of money. Therefore, people have less purchasing power and their money is worth less. Inflation may not lower the dollar amount in your paycheck, but it does increase your cost of living—making it more expensive to buy goods and services.
How Does Inflation Make It More Difficult to Escape Poverty?
Families living below the international poverty line often struggle to feed themselves. When food is available and accessible, it's not always the food necessary for a healthy diet, and a healthy diet costs almost three times the average food expenditure in low-income countries. So for those already struggling to eat, when the price of food rises, so do hunger, undernourishment and malnutrition.
Malnutrition in an expecting mother harms the baby's development and decreases birth weight, which translates to a shorter life expectancy for the child. If a child does escape this reality, malnutrition has often left him or her with impaired cognitive abilities that hinder learning and school performance, subsequently affecting the child's future quality of life and income earning potential.
Without intervention, a child who grows up malnourished in extreme poverty often becomes an adult struggling to survive and provide for a family on a low income. Inflation increases the cost of food and worsens food scarcity, increasing the likelihood that families will remain trapped in a cycle of poverty for generations.
Can Inflation Affect a Child's Physical, Emotional or Spiritual Development?
If a family is unable to afford food due to inflation, children experience hunger, undernourishment and even malnutrition. A developing body that lacks the nutrition needed to grow will develop a deficiency in brain architecture along with the accompanying range of broad physical, social, and emotional skills. Malnutrition can damage organs and the brain, causing impaired speech, memory, and overall cognitive processing skills.
In addition, malnutrition shortens life expectancy and inflates infant and child mortality rates. It increases the likelihood of contracting preventable diseases or experiencing chronic health conditions, and it inhibits learning, increases stress and introduces insecurity and instability into children's lives. From time in utero, through the elementary years, a child's early developmental needs – and the way those needs are responded to – shape the rest of his or her life. For those in poverty, inflation can stunt their growth in every area.
How Conflict Around the World Contributes to Inflation
You don't have to be an economist to understand that food is really expensive right now. And unfortunately, with the war in Ukraine, global food prices are expected to climb even higher, placing the heaviest burden on the most vulnerable populations around the world.
The president of the International Fund for Agricultural Development, Gilbert Houngbo, expressed concern that the crisis in Ukraine will impact global food security. As if the devastation in Ukraine isn't enough, the ripple effect for the entire world, particularly those already struggling to feed their families, will be catastrophic. Russia and Ukraine together account for 30% of world wheat exports and 18% of world corn exports, primarily shipped through Black Sea ports that the war has closed1. “This area of the Black Sea plays a major role in the global food system, exporting at least 12 percent of the food calories traded in the world,” said Houngbo. “Forty percent of wheat and corn exports from Ukraine go to the Middle East and Africa, which are already grappling with hunger issues, and where further food shortages or price increases could stoke social unrest.”
Subsequently, higher oil prices will increase harvesting, transporting and food processing costs.
“Africa is particularly vulnerable to impacts from the Ukraine war through four main channels,” says Kristalina Georgieva, Managing Director of the International Monetary Fund “increased food prices, higher fuel prices, lower tourism revenues, and potentially more difficulty accessing international capital markets.”
Record wheat prices are particularly concerning for sub-Saharan Africa, which imports around 85% of its supplies, one-third of which come from Russia and Ukraine4.
This chart from the International Monetary Fund reveals how price increases will have a global impact, especially on impoverished families for whom food is a higher portion of expenses. As mentioned above, food accounts for 17% of spending in advanced economies but more than doubles in sub-Saharan Africa1.