Does Inflation Hurt the Low-Income Group Less Than the Rich?
Here's a look at research and consumption data to ascertain the validity of the Finance Ministry's recent claim that the poor were less impacted by inflation
Inflation in India rose to an eight-year high in April 2022 with skyrocketing food and energy costs. Soon after the Centre released the April inflation figures, the Union Ministry of Finance, in the Monthly Economic Review released on May 12, 2022, observed that inflation impacts low-income groups less than those with a high income.
"Evidence on consumption patterns suggests that inflation in India has a lesser impact on low-income strata than on high-income groups," read the review released by the ministry's Department of Economic Affairs (DEA).
This was missing from the Press Information Bureau's fact-check that came three days later.
The PIB's fact-checking unit on May 15 countered a post being widely shared over social media with an image of Union Finance Minister Nirmala Sitharaman claiming that the Finance Ministry has stated "inflation hurts rich more than poor in 2022".
While the PIB clarified that the ministry "had not given such statement", the ministry did make a similar observation in their April Review as quoted above.
How the Ministry Argues Rich More Affected
The DEA substantiates its claim with an analysis of National Sample Survey Organisation (NSSO) data. In this analysis, the department uses consumer expenditure data from the NSSO and maps it alongside rural and urban inflation rates for FY 2020-21 and FY 2021-22 to achieve 'effective headline inflation' across different expenditure groups.
The three consumer groups in the report are the bottom 20%, middle 60%, and top 20%. Their areas of expenditure are also divided into three categories: food and beverages, fuel and light (including transportation) and refined core (excluding food and fuel).
The overall inflation as measured by the Consumer Price Index (CPI) fell from 6.2% in 2020-21 to 5.5% in 2021-22. According to the analysis provided in the report, the fall in effective inflation was not equal across all expenditure groups and was actually more pronounced in the low- and middle-income groups. The inference thus drawn was that "lower inflation has reinforced the favourable redistribution of the income from top to bottom and middle-income group".
Another claim made in the review was that "relatively low" food inflation cushioned the bottom and middle groups as their predominant share of expenditure is on food.
FactChecker looked at existing research and the most recent inflation data to provide additional context to the ministry's claims.
Drivers of Inflation and Consumption Patterns
The NSSO releases data on Monthly Per Capita Expenditure (MPCE) every five years. The expenditure of various spending groups is calculated across 10 deciles, from 0 to 100 percentile based on the amount they spend every month. The expenditure is also classified into 'food' and 'non-food' segments to find out spending patterns of different percentile groups.
The MPCE data, which is used by the DEA as well, is from 10 years ago (2011-12). While the consumer survey is conducted every five years, the data for 2017-18 was not released. The Ministry of Statistics & Programme Implementation (MoSPI) cited "data quality issues" for this. "There was a significant increase in the divergence in not only the levels in the consumption pattern but also the direction of the change when compared to the other administrative data sources like the actual production of goods and services," read MoSPI's statement.
The point where the curves intersect is where the share of food falls to 50%, and thereafter, more is spent on non-food than on food. The data shows that the share of non-food overtakes the share of food only around the 90th percentile in rural population. This means that in rural areas, only people in the 10th decile are able to spend more on non-food than food. Even in urban areas, the population up to the 4th decile (40th percentile) still spends more on food than non-food items. The trend changes in between the 40-50 percentile.
Professor Himanshu from the Centre for Economic Studies and Planning, Jawahar Lal Nehru University, told FactChecker that food is classified as an inelastic component of the total expenditure as it remains more or less constant every month despite one's income.
The non-food items, however, come under what could be called discretionary spending which may vary every month. If prices go up, one may cut down on their discretionary spending but will likely not be able to cut down on food.
This means that if food prices are driving the inflation, the lower and middle expenditure groups will be the ones impacted the most because more than half of their expenditure is on food items, as is the case right now.
The combined inflation is as high as 7.79% and food inflation has soared even higher to 8.38%. The corresponding percentages for April last year were 4.23% (combined) and 1.96% (food).
The Russian invasion of Ukraine has led global petroleum prices to skyrocket, with fuel inflation in India climbing to 38.66% in April. Transportation costs continue to increase as a result of the fuel price hike, and consequently, food inflation increased by a whopping 6.51% within the last 6 months.
Here is a look at the inflation rates for some of the common food items in April 2022, alongside their percentage share in the average monthly per capita expenditure.
Edible oils and fats remain the category with the highest spike in inflation (17.28%), followed by vegetables (15.41%) and spices (10.28%).
The Wholesale Price Index (WPI) has also seen an upward trend in the past year, as it touched a 17-year high of 15.08% in April 2022. "We will see wholesale inflation reflecting soon in the retail prices," said Himanshu while adding that "this is more likely to cause a longer spell of inflation".
Impact of Inflation
Research has shown that low- and middle-income households tend to be more vulnerable to an uptick in inflation. Poorer households often lack access to financial assets that they one could fall back on, in times of a price-spike. Households that have recently escaped poverty can be pushed back into it by rising inflation.
According to economists at the World Bank, the bottom 40% population of each country on average faces 3% higher inflation than the top 60%, if we refer to the current food inflation levels. The simulation also showed that globally, poverty levels are sure to be exacerbated by rising prices. The world could see an additional 75 million to 95 million people pushed into poverty.
"Inflation continues to accelerate, reducing the real incomes of households around the world, especially the poor. For every one percentage point increase in food prices, 10 million people are expected to fall into extreme poverty," said World Bank President David Malpass, in his speech at the Spring Meeting held between the World Bank Group and the International Monetary Fund in April 2022.
He mentioned how high-income groups can suddenly afford expensive staples, but the poor cannot and will consequently lose access to nutritious food. As a result, malnutrition might grow and its effects would be hard to reverse in children.
The Reserve Bank of India Governor Shaktikanta Das too, while hiking repo rate by 40 base points (from 4% to 4.4%), said sustained high inflation can have "pronounced adverse effects on the poorer segments of the population by eroding their purchasing power" and "inevitably hurt savings".