Low-income households facing the heat

In June this year, the inflation rate in Bangladesh soared to 7.56%, its highest level in nine years. Rising inflation has become a matter of grave concern as rising daily prices of basic necessities are severely hurting a significant portion of households across the country. But behind the widely reported higher levels of inflation, a major problem – “inflation inequality” often receives minimal attention.

The COVID-19 pandemic has resulted in supply and demand side shocks. The pandemic has also deepened inequality around the world, with the rich getting richer and the poor getting poorer.

As the COVID-19 situation has improved, demand for food and non-food items has increased. However, the world is now facing huge global supply chain disruptions due to the Russian-Ukrainian war, which has hampered production and trade, creating catastrophic fuel and food shortages on a global scale. world.

As a result, prices from basic food items to luxuries have risen dramatically. A new poor class has emerged due to the COVID-19 pandemic, which has seen its numbers increase as continued inflationary pressure has disproportionately affected low- and middle-income households.

Rising price levels have resurrected the problem of inflation inequality around the world. Inflation inequality is a phenomenon where the weight of rising prices has an unequal impact on different income groups due to differences in price increases of different goods and variations in household spending habits. .

High income groups have lower price elasticity of demand (PED), while middle and low income groups have higher PED. PED is the responsiveness of quantity demanded due to price change.

It is higher if people are price sensitive, while it is lower for relatively price insensitive people. Therefore, the price increase is higher for middle and low income groups, while the impact is lower for high income groups.

As a result, middle and low income groups with a limited consumption basket have to further shorten their basket by excluding necessary items. In comparison, high income groups bring little or no change.

For example, the price of eggs increased by around 32% in the country during the third week of August 2022. This increase in the price of eggs has a significant impact on the consumption basket of middle to low income households. , while there is an insignificant or no impact. on the consumption basket of high-income households. Scenarios like this exacerbate inequalities in society and an economy, which has serious consequences for food and nutrition intake and outcomes.

According to the life-cycle hypothesis, individuals tend to smooth their consumption pattern over their lifetime by saving when their income is high and borrowing when their income is low.

As middle and low income groups lack savings, they have more difficulty smoothing their consumption. Moreover, the savings of the aforementioned groups are held in low-interest and cash bank accounts that are generally not immune to rising price levels.

Due to differences in the consumption habits of individuals, people may also experience different rates of inflation. The relative weight of a specific good in the consumption basket is a determining factor of inflation inequality.

The share of food consumption expenditure in total expenditure is higher for low income groups than for high income groups in Bangladesh. According to the Bangladesh Bureau of Statistics (BBS), the general inflation rate was 7.5% in July 2022, while food inflation and non-food inflation were 8.2% and 6.4% , respectively.

This shows that an increase in general price levels will have a significantly greater impact on middle and lower income groups due to their higher share of food consumption expenditure compared to total expenditure. Thus, the type of inflation experienced by a household also depends on the composition of its expenditure or consumption basket.

So the question arises, what should be done to remedy this situation? The Trading Corporation of Bangladesh (TCB) provides essential food items at subsidized prices to the low income group in the country.

The coverage and allocation of this program should be extended until inflation falls to a moderate level. The government of Bangladesh has drawn up a plan to provide special cards to 1 million people to purchase essential items at lower prices and has already distributed the cards to 50 lakh people who can purchase rice at just Tk 10 per kg.

Market control will also play a key role here. We see that even when rice production was high this year, the price of rice went up for no good reason.

For example, transport costs increased by 0.7 Tk while the price of rice increased by 5 Tk in the country’s main wholesale markets. Unscrupulous unions are actively working behind this price hike. These types of unions must be dismantled and punished to control unreasonable price increases.

In the long term, reducing socio-economic disparities, increasing productivity and a compatible monetary and fiscal policy will help reduce these inequalities.

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About Aldrich Stanley

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