On Inflation and Poverty: It’s getting more expensive to be poor

data politics economics dataviz

Because the prices of various goods and services rise and fall at different rates, different groups of people, most notably the poor, experience the burden of inflation much more than the rest of the population.

TJ Palanca https://www.twitter.com/tjpalanca
05-11-2014
We tend to think of inflation as a singular force that affects everyone the same way. It turns out however that the poorest households may have m'ore to lose as the peso shrinks. In this photo is a 100 trillion Zimbabwe dollar bill, commonplace during its period of hyperinflation. (Photo: <a href='https://www.flickr.com/photos/vegaseddie/4353407858/in/photolist-7CGmub-iPFXsH-5Yv1Eh-9Mxvej-9Mxveb-9Mxvem-aPsDhF-dvSfcy-9BDra4-5729SD-cSjkVQ-baF7z4-8Wgtd-b2XLqp-dPGh8m-dmyfCP-tCL7D-8eoT9r-dvSd4Y-dvSim5-dvSfs7-dvSgFh-dvLDhg-dvSc25-dvSg2G-dvLGwV-dvLDyk-dvLHpK-aPsMUV-6pmJu4-jjzRr-jgKXf-ei8bj9-sXJwe-7wYrsn-576m2j-aPsUMZ-dVkNy4-aPsNP8-73H7pG-dvLHyP-dvLDNp-dvLFYk-dvLD3X' rel='nofollow'>Paul/Flickr </a>, <a href='https://creativecommons.org/licenses/by/2.0/' rel='nofollow' target='_blank'>CC BY 2.0</a>)

Figure 1: We tend to think of inflation as a singular force that affects everyone the same way. It turns out however that the poorest households may have m’ore to lose as the peso shrinks. In this photo is a 100 trillion Zimbabwe dollar bill, commonplace during its period of hyperinflation. (Photo: Paul/Flickr , CC BY 2.0)

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Everyone knows about inflation - a pervasive, unstoppable force that moves prices (and hopefully wages) upward in the economy, but do we really understand it? Further analysis reveals that official overall inflation statistics understate the effect of rising prices on the poor.

Understanding Inflation

Inflation is measured through changes in what is called the Consumer Price Index or CPI. This is an aggregate measure of prices based on a certain ‘basket’ of goods composed of those typically consumed by households. It seems like a fair enough way to measure general price increases, but it has the effect of making you think that inflation affects everyone equally - it does not.

The basket of goods is an approximation of the average proportions that households consume. It turns out, however, that there are significant differences in the basket of goods for households from different income levels: