How Inflation Impacts the Poor

Inflation is inevitable. But the high-inflation is devastating to the poor. The reason is that the increase in consumer prices outpaces increase in wages. Inflation is a powerful destroyer when not properly managed.

According to the Brookings Institute, “inflation refers to changes over time in the overall level of prices of goods and services throughout the economy. The government measures inflation by comparing the current prices of a set of goods and services to previous prices.” 

The two most looked too indexes that calculate the inflation rate in the United States are the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE).

Inflation is very high in the United States. This is why the Federal Reserve is attempting to solve high inflation through interest rate hikes. Will this strategy work? Only time will reveal this answer. 

Inflation Rates in Poorer Countries

  • Honduras: 2023 Projected Consumer Prices (% Change): 8.5%
  • Guatemala: 2023 Projected Consumer Prices (% Change): 5.6%
  • Costa Rica: 2023 Projected Consumer Prices (% Change): 6.4

The problem with this type of rapid inflation acceleration is that wages in these countries does not rise as fast as the rate of inflation. These is especially true for the poorest in each country. The middle and upper classes fare much better during inflationary times.

Example: Jose works as a truck driver earning 4,000 lempira (around $162 in March 2023) is able to support his family and have around 400 lempira for savings. After the inflation of 8.5% 2023, Jose will have to use all 400 lempira that he previously saved to support his family. Due to inflation, his employer provides a 3% raise. This 3% raise equals 120 lempira.

Net Result: Inflation Cost = 400 lempira; Jose’s raise if 120 lempira; Jose loses 280 lempira to inflation. Same food, same home, same schooling, etc. 

The most damaging outcome from this scenario (example) is that Jose no longer is saving anything for emergencies. If an emergency happens the family may need to go into debt or go without food, clothing, medicine, etc. 

Prior research suggests that inflation hits low-income households hardest for several reasons. They spend more of their income on necessities such as food, gas and rent—categories with greater-than-average inflation rates—leaving few ways to reduce spending.” – Federal Reserve Bank of Dallas

High Inflation and Poverty

According to World Bank, the poverty rate (U$6.85 in 2017 PPP per day per person) is expected to decrease to 54.6 percent by 2023. High inflation will limit the purchasing power of households, curbing efforts to reduce poverty and inequality.

A slowdown of remittances could slow down private consumption, further hindering poverty and inequality reduction.

We See the Impact First-hand

On our recent trip to Honduras, we witnessed the impact of inflation first-hand. The poor communities are suffering. Many of the areas where we serve have been impacted by higher costs for fuel, food, housing and other consumables. Those on a fixed income are devastated, while many students feel the pressure from costs passed on by the schools.

Just about everything has increased in price over the past 36-months. Most items increased 25-35% over that period. Students, the elderly and individuals working in low-paying jobs are being crushed. This is because they do not have any way to make up for the increase in consumer prices. 

Please pray and help. There are many people facing an uncertain future due to the global inflation crisis. Debt, inflation, and political unrest is causing many issues around the world. Most that suffer are those living in poverty.