What happens to the poor when inflation spikes?
The world is facing dire economic difficulties. There is surging inflation. Stocks and bonds are losing value and are volatile. Interest rates are climbing. Unemployment is growing in some areas. Economies are at risk. Poverty has been on the rise in many places since the onset of the COVID-19 pandemic, and has climbed further following the shock of the Russian-Ukraine War.
For the poor, stocks and bonds prices mostly affect them when the loss in the value of these assets might affect their employment. The poor do not invest in stocks or bonds. They have little to no savings. They live from payday to payday — if they are paid. They are more often in debt than those who are less poor.
The interest rates the poor are charged are often higher than for the better off, given the sense of risk lenders have in loaning to them. Also, banks will often not even let them in the door, never mind lend to them. Often the poor must turn to loan sharks and criminal gangs for loans. Their interest rates might rise alongside legal loans, but are usually much higher.
And the poor may have to pay more than just interest if they are late in paying. Grameen Banks, founded in Bangladesh in 1983, are one place they can turn to, but there are not enough of these community lenders to protect the poor from vultures who operate across economies.
When inflation is surging we all pay more for food, housing, water, heating, cooling, schooling, medicines and just about everything else. For those lucky enough to be in the middle and upper classes, food price increases might sting a little. But for the poor increases in food prices may push them greater into poverty.
They may also have to choose between feeding their families and medicines. They may have to choose between having a roof over their heads or food in their bellies. They may have to choose between being hungry and obtaining schooling for the children. In hot weather, it may push them to choose between clean water, if available, and dirty water when available. Dirty water is one of the main causes of death and sickness in the world.
The poor, and especially the children of the poor, are the ones who get sick from dirty water the most. They are the ones who go hungry and fall prey to famine more than others. Many poor are living on the edge of homelessness, or are already there. Many poor must migrate from their homes to the big cities and other countries, and the troubles and opportunities that await.
When the poor do not get schooling, or apprenticeship training, they remain poor. The poor have low to no leverage to get jobs other than menial ones unless they have skills. And that takes education and training.
In inflationary times it is much more difficult to get out of poverty than when prices are stable and lower. The poor pay a greater percentage of their income on the basic needs of life than others. Taking into account their little, to no, or even negative savings, one can conclude that more poor will be pushed into even worse situations by rising inflation.
Like all of us, the poor want hope. They want a sense of honor in their lives. The extra psychological pressures and tensions placed on them in times of inflation could push some of the poor to crime, terrorism, violence, and, sometimes, at the very least, demonstrations in the streets.
Add in the vast inequalities of income and wealth in the world, inflation, and some of the recent economic shocks, and expected economic shocks, could push some people and some places over the edge.
Most of the most vulnerable in the world are often the poor. That seems obvious. If we do not think about, care about, or help them, there could be major problems coming the way of the better off.
There is also common humanity that needs to be considered. Yes, this is a cold-hearted and brutal world at times. For many of the poor it is that way all the time. Help could go a long way to making the lives of the poor better.
In the short run, they will need the necessities of food, water, housing, and basic health care. Over the longer run, they will need education, training, much-improved health care, and a sense of honor and hope. For those of you reading this who have been poor and are no longer, you know what I mean. For those of you who are reading this and are poor, you will feel the pain and humiliation greater than anyone else.
Leaders are required to take care of all the people, not just the wealthy and connected. History shows us that when leaders do not do this they are likely to face trouble.
Fewer people are wealthy than poor, or near poor. As one of my students from a developing country told me years ago. And what he said has stuck in my mind. I had a photo on my wall of poor people from the country where he was from. He looked at it and said: “Dr, these people worry me.” I asked him why. His answer was: “There are many more of them than there are of us.”
We can all benefit from helping the poor get out of poverty. Over the centuries getting billions of poor out of poverty has been the world’s greatest accomplishment. We can do more. And we can all win from this. There is an old saying in my country. The grammar is not good, but it makes sense.
One can do well by doing good.
• Dr. Paul Sullivan is a senior research associate at KFCRIS and a non-resident fellow, Global Energy Center, Atlantic Council.