Inter-American Development Bank
facebook
twitter
youtube
linkedin
instagram
Abierto al públicoBeyond BordersCaribbean Development TrendsCiudades SosteniblesEnergía para el FuturoEnfoque EducaciónFactor TrabajoGente SaludableGestión fiscalGobernarteIdeas MatterIdeas que CuentanIdeaçãoImpactoIndustrias CreativasLa Maleta AbiertaMoviliblogMás Allá de las FronterasNegocios SosteniblesPrimeros PasosPuntos sobre la iSeguridad CiudadanaSostenibilidadVolvamos a la fuente¿Y si hablamos de igualdad?Home
Citizen Security and Justice Creative Industries Development Effectiveness Early Childhood Development Education Energy Envirnment. Climate Change and Safeguards Fiscal policy and management Gender and Diversity Health Labor and pensions Open Knowledge Public management Science, Technology and Innovation  Trade and Regional Integration Urban Development and Housing Water and Sanitation
  • Skip to main content
  • Skip to secondary menu
  • Skip to primary sidebar
  • Skip to footer

Ideas Matter

  • HOME
  • CATEGORIES
    • Behavioral Economics
    • Environment and Climate Change
    • Macroeconomics and Finance
    • Microeconomics and Competitiveness
    • Politics and Institutions
    • Social Issues
  • Authors
  • Spanish

Inflation and Its Impact on the Poor in the Era of COVID-19

October 12, 2021 by Victoria Nuguer - Eric Parrado 1 Comment


Inflation has become a growing concern for central banks in Latin America and the Caribbean. The recovery in economic activity was stronger than expected in the first months of 2021, reflecting the stimulus that governments deployed to mitigate the effects of the pandemic and higher mobility and lower containment measures. However, inflation and inflation expectations in the region are also rising (see the figure below).

This is all happening as countries are being threatened by new variants of COVID-19, such as Delta, and new waves of infection that could delay economic recovery and growth.  The perils are potentially great. Many countries in the region now face the twin risks of economic slowdown and high inflation, with a resulting impact on the poor that could be immense.  

Inflation
  1. Change in the Costumer Price Index from December 2020 to August 2021.
  2. Expected change in Costumer Price Index from December 2020 to December 2021.
  3. Change in the Costumer Price Index from December 2019 to December 2020.

Source: Own estimations using data from Haver and the IDB.

The Responsibility for Fighting Inflation

For years now, central banks have been using inflation targeting, explicitly or implicitly. When inflation expectations were higher than the inflation target, this often led to an increase in the policy interest rate. That decreased the threat of inflation, which particularly affects the poor. The big questions today are whether current developments reflect a temporary or a permanent pressure on prices and whether inflation expectations are being affected. Most importantly for policymakers, it begs the question as to what should be done.

Our research suggests that the priority of central banks in the short and medium term should be the fight against inflation. That will help preserve citizens’ purchasing power, and because it will empower entrepreneurs to make sound economic decisions, also eventually help with economic recovery. By contrast, if inflation expectations are unanchored as a result of central banks’ inaction, the negative impact will be substantial both in the short-term because of a rise in inflation and in the medium-term because of the additional costs created by reacting late and seeing an additional tightening of interest rates.

The management of inflation can affect distinct economic tiers of the population differently. In a recent study, we demonstrated how low inflation is associated with a reduction in poverty and a growing middle class. We also found that inflation is correlated positively with unemployment and negatively with inequality. Our model suggests that increasing inflation by 1% increases the percentage of low-income households by around 7% and reduces the percentage of high-income households by around 1%.

The Impact of Inflation on the Poor

Inflation places a very high burden on poor households because they are largely hand-to-mouth consumers. Compared to richer families, even small increases in prices have strong implications for their consumption. Uncontrolled inflation, moreover, generates poverty traps. It forces low-income households to avoid starvation by eating lower quality food, potentially affecting their children’s cognitive development.

The poor are more exposed to inflation because they lack the means to preserve their purchasing power. Their access to financial markets is limited or nonexistent, so they cannot use credit to smooth their consumption. Or if they have access, they depend on debt, usually from informal markets, to meet basic needs. In addition, their income usually also comes from the informal sector, so they are not covered by public or private institutional arrangements that protect employees from price increases. And they do not have the capacity to save, meaning they can neither use their money to maintain their consumption habits nor buy indexed financial instruments to conserve the value of their assets.

High-income and middle-income households, on the other hand, have some access to those tools and ever greater access to them as their income increases. Thus, efforts to reign in inflation are a fight not only against the vulnerabilities of the poor but also against inequality.

Targeting Inflation for Inclusive Growth

The goal of the region’s central banks is controlling inflation. They will be under pressure to increase the policy rate if they believe inflation is becoming a permanent phenomenon. They need to both ensure inflation expectations are anchored and do not hold back the recovery.  The right decisions will help partially offset the increases in poverty and inequality we are seeing as a result of the pandemic,  help  businesses make rational decisions and contribute over the  long term to economic health and inclusive growth.


Filed Under: Macroeconomics and Finance Tagged With: #CentralBanks, #Inflation

Victoria Nuguer

Victoria Nuguer is a Research Economist in the Inter-American Development Bank’s Research Department. She holds a Ph.D. from École Polytechnique Fédéral de Lausanne in Switzerland and a bachelor’s degree from the Universidad de Buenos Aires in Argentina. Prior to joining the Bank in May 2017, she spent nearly three years as a Research Economist in the Bank of Mexico. Victoria’s main research agenda focuses on building dynamic stochastic general equilibrium models to explain key financial transmission mechanisms in closed and open economies. For closed economies, she has focused on the propagation of financial shocks from the housing sector to the rest of the economy. Regarding open economies, Victoria has studied the international transmission of financial shocks from advanced to emerging economies through the bank lending channel. Recently, she has been working on understanding the strategic interaction between monetary and macroprudential policies and on the role of trade credit when firms set prices in emerging economies.

Eric Parrado

Eric Parrado Herrera is Chief Economist and General Manager of the IDB’s Research Department since March 2019. Before joining the IDB, he was a professor of economics and finance at the ESE Business School of the Universidad de los Andes in Santiago, Chile. Mr. Parrado is a visiting professor at Oxford University and the Central European University, and a member of the World Economic Forum's Global Future Council on Financial and Monetary Systems. Throughout his professional career, Mr. Parrado has focused on monetary, fiscal and financial policy, advising central banks on managing inflation targeting regimes and implementing sovereign wealth funds in several countries. He has also written several academic articles on monetary policy, fiscal policy and sovereign wealth funds.

Reader Interactions

Comments

  1. Rajeev says

    January 6, 2022 at 10:14 am

    Inflation is really too much brutal for the poor folks out there, These people actually end up spending a good chunk of their earnings just on the basic stuff with no room for savings or anything.

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

Follow Us

Subscribe

Search

Related posts

  • Fighting Inflation With Better Communication
  • A Critical Moment for Central Bank Autonomy
  • The Universal Factors Behind Inflation in Latin America and the Caribbean
  • Preparing the Macroeconomic Terrain for Renewed Growth
  • Lessons from the Lost Decade for Confronting Inflation Today

About this blog

The blog of the IDB's Research Department shares ideas that matter on public policy and development in Latin America and the Caribbean.

Footer

Banco Interamericano de Desarrollo
facebook
twitter
youtube
youtube
youtube

Blog posts written by Bank employees:

Copyright © Inter-American Development Bank ("IDB"). This work is licensed under a Creative Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives. (CC-IGO 3.0 BY-NC-ND) license and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed. Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC- IGO license. Note that link provided above includes additional terms and conditions of the license.


For blogs written by external parties:

For questions concerning copyright for authors that are not IADB employees please complete the contact form for this blog.

The opinions expressed in this blog are those of the authors and do not necessarily reflect the views of the IDB, its Board of Directors, or the countries they represent.

Attribution: in addition to giving attribution to the respective author and copyright owner, as appropriate, we would appreciate if you could include a link that remits back the IDB Blogs website.



Privacy Policy

Copyright © 2023 · Magazine Pro on Genesis Framework · WordPress · Log in

Banco Interamericano de Desarrollo

Aviso Legal

Las opiniones expresadas en estos blogs son las de los autores y no necesariamente reflejan las opiniones del Banco Interamericano de Desarrollo, sus directivas, la Asamblea de Gobernadores o sus países miembros.

facebook
twitter
youtube
This site uses cookies to optimize functionality and give you the best possible experience. If you continue to navigate this website beyond this page, cookies will be placed on your browser.
To learn more about cookies, click here
X
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled

Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.

Non-necessary

Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.

SAVE & ACCEPT