Different Perspectives Of Inflation

The World Bank blog on the impact of inflation on the poor (excerpt; emphasis added):

Taxing the poor… through inflation

Imagine you are spending half of your income on something whose price suddenly increases by a quarter. Seems impossible? This is how in fact inflation has hit the poor in many developing countries, especially Kenya.

This September, overall inflation reached a record high of 17.3 percent. One year ago it was just above 3 percent. Why has it increased so sharply even though Kenya has followed prudent macro policies? The short answer is: food and fuel. In Kenya, food accounts for 36 percent of the average person’s expenditures; energy and transport another 27 percent. The urban poor spend more than 43 percent on food. Since January, food prices have increased by almost 25 percent (see figure), partly as a result of international trends but also due to Kenya’s- agriculture policies. Maize prices tripled between January and June until they retreated a little once the government waived import duties and the 2011 harvest started trickling in.

So if you are exposed to high inflation, there is no choice but to cut down on food or on other expenses, many of which are vital, such as school fees or health care. This is why inflation is the worst tax on the poor.

Kenya’s National Bureau of Statistics is calculating inflation for different income groups in Kenya and it is interesting –although perhaps not surprising- to see that the rich and the middle class only have a moderate problem. They experience price increases of about 10 percent. But for the poor, those who earn less than Ksh 200 a day, inflation now stands close to 20 percent. The rich can also move their money out of the country if inflation becomes too high – an option the poor don’t have. What about poor farmers? Don’t they benefit from higher food prices? They should but often they don’t. Two thirds of Kenyan farmers are net food consumers and are therefore hurt by rising food prices – although to a lesser extent…

…The reason is “supply shocks”: higher import prices that are the result of external factors beyond Kenya’s control. An example was the spike in international oil prices following the “Arab Spring”. The tools available to the Central Bank mainly affect “core inflation” which is all the items beyond food and fuel which people use and consume (phones, rent, cement, etc.). This year, the fuel bill alone will likely be as large as Kenya’s total exports. Investors become wary of investing in countries with high inflation, which is one of the reasons why the exchange rate has been plummeting, and why it is so important for any country, not just Kenya, to focus squarely on fighting inflation.

Beyond the main point about the rising cost of living and the impact of cost-push inflation, what I want to point out here is the different experience of inflation between the poor and the rich, or even the moderately well off. Different consumption baskets mean that increases in transport and fuel costs will affect different income brackets in uneven ways – for example, fuel increases hit the middle class worse than it does the poor, while the opposite is true of food.

I put down the dichotomy between headline inflation in Malaysia and the perception of the average man on the street of inflation, to this heterogeneity in the consumption of goods. So on the one hand, it’s fair to say that increases in the Malaysian cost of living appears to be higher than the official statistics imply. But that doesn’t mean that the official statistics are wrong.

What’s needed here is what Kenya in the blog post quoted above is doing – calculating inflation rates for different consumption baskets. The basic ingredients for this are already available – the household income and expenditure surveys already document spending at different income levels. Couple that with existing consumer price surveys, and all it should take is calculating the relevant indexes.

Over to you, DOS.