Inflation and Poverty

• Inflation:

In economics, inflation is a sustained increase in the general price level of goods and services in the economy over the period of time. As prices of goods increases consumers tends to consume lesser and lesser of the goods. Consequently, inflation reflects a reduction in purchasing power per unit of money.

• Poverty:

Fundamentally, poverty is the inability of getting choices and opportunities, a violation of Human dignity. It means lack of basic capacity to participate effectively in society. It means not having enough to feed and clothe a family, not having a school or clinic to go to, not having the land on which to grow one’s food or a job to earn one’s living, not having access to credit. It means insecurity, powerlessness and exclusion of individuals, households and communities. It often implies living in marginal or fragile environments, without access to clean water or sanitation.

As inflation and poverty are related to the price level so it should also be defined. 

• Price level:

The price level is a hypothetical daily measure of overall prices for some set of goods and services in an economy.

• Inflation, poverty and price level:

 Price level acts as the base of causing inflation and poverty. As the price level increases purchasing power of a consumer decreases keeping the income unchanged. As the income remains unchanged the consumer's ability to purchase more of the goods decreases. It also happens that as the prices of the goods keep on increasing at a higher rate with income unchanged poverty is caused. consumers do not have enough income to purchase goods and services. 

For Example:

Take one commodity case. Suppose your present income is $100 and price level of a specific good is $10. So, we can purchase 10 units of specific good but if the income remained unchanged and the price of a specific good increases and become $20. So, now we can purchase only 5 units of that good instead of 10. Our purchasing power decreases. So, less units of goods were consumed when the prices increased.

• Measures of Inflation:

Most commonly following two methods are used to calculate inflation:

1. Consumer Price Index:

It measures the average change in the prices of the consumer goods and services such as gasoline, food clothing, and automobiles etc. It measures the price change from the perspective of purchaser. It is calculated by formula:
CPI= Price of most recent market basket in a specific year / Price estimate of market basket in some year X 100
For example:
Let's assume that rate of inflation of some country was 207.3 in year 2007 up from 201.6 in 2006. So, the rate of inflation for 2007 is calculated as follows:
CPI = 207.3 - 201.6/ 201.6 x 100 = 2.8%

2. Producer Price Index:

It measures the average change in the selling prices by domestic producers of a good and service. It measures the pries from the perspective of a seller.

• Types of Inflation:

Nearly all prices in the economy are set by demand and supply. Consequently, if economy is experiencing inflation we need to for an explanation in terms of demand and supply. So on this basis inflation is of two types:

1. Demand pull inflation

Demand pull Inflation

If the economy is at or close to full employment then an increase in aggregate demand AD leads to an increase in the price level. As firms reach full capacity, they respond by putting up prices, leading to inflation. Also, near full employment, workers can get higher wages which increases their spending power. AD can increase due to an increase in any of its components C+I+G+X-M. We tend to get demand pull inflation, if economic growth is above the long run trend rate of growth. The long run trend rate of economic growth is the average sustainable rate of growth and is determined by the growth in productivity.

2. Cost Push Inflation:

If there is an increase in the costs of firms, then firms will pass this on to consumers. There will be a shift to the left in the AS. 

• Measuring Poverty:

People earning less than $200 a day or having less then this amount to be spent on basic needs are considered to be poor. Poverty is checked individually and also aggregate. If a person is below some specific point on poverty line he’s considered as poor. His position is checked by different standards such as nutrition level, living conditions etc.

• Types of poverty:

When measuring poverty it may be absolute or relative.

·         Absolute poverty means when a person do not have enough earning to fulfill his basic needs or he do not have minimum expenditures to full fill his food or non-food items.

·         Relative Poverty means when a person is earning some income but his standard of living is low as compared to rest of society. It is just like checking poorest of poor.

For Example:

People living in Islamabad have different standards as compared to people living in Rawalpindi. People are earning income but have different standards, living conditions, facilities etc.

• Reasons of Inflation:

Most of the world’s countries are facing inflation. Many factors are causing inflation. Some causes of inflation are:
 1. Rising Wages:

Most of the times trade unions are formed and these trade unions can present a common front then they can bargain for higher wages. Rising wages are a key cause of cost push inflation because wages are the most significant cost for many firms. (Higher wages may also contribute to rising demand).  

  

2. Import prices:
If there is devaluation import prices becomes more expensive leading to an increase in inflation. A devaluation / depreciation means that the country’s currency is worth less, therefore a country has to pay more to buy the same imported goods.                                                                      

   

UK Inflation CPI in 2007-2013.

For example:

We take a case of UK’s currency case. One third of all goods are imported in the UK. If the value of pound will decrease or depreciated as compared to the international currency they have to pay more for import goods and it will increase the prices of that goods and people have to spend more on them to buy them. As the price of raw material as well as final gods will increase it will also increase inflation. In 2011/12, the UK experienced a rise in cost-push inflation, partly due to the depreciation in the Pound against the Euro. (Also due to higher taxes).

3. Raw Material Prices:

A material or a substance used in the primary production. For example wood, oil, cotton and iron etc. If the prices of basic raw material increase the prices of final goods also increase. People have to spent more to purchase them. It increases the prices and cause inflation.

• For example:

The best example is the price of oil, if the oil price increase by 20% then this will have a significant impact on most goods in the economy and this will lead to cost push inflation. E.g. in early 2008, there was a spike in the price of oil to over $150 causing a temporary rise in inflation.

4.  Declining productivity:

If firms become less productive and allow costs to rise, this invariably leads to higher prices. The firm do not choose efficient resources for production and choose less productive policies which cause the increase in the prices of final goods. So, it also cause inflation.

5. Higher taxes:

If the government put up taxes, this will lead to higher prices, and therefore CPI will increase which will increase inflation.

6. Rising house prices

Rising house prices do not directly cause inflation, but they can cause a positive wealth effect and encourage consumer led economic growth. This can indirectly cause demand pull inflation.

7. Printing more money

If the Central Bank prints more money, you would expect to see a rise in inflation. This is because the money supply plays an important role in determining prices. If there is more money chasing the same amount of goods, then prices will rise. Hyperinflation is usually caused by an extreme increase in the money supply

However, in exceptional circumstances – such as liquidity trap / recession, it is possible to increase the money supply without causing inflation. This is because in recession, an increase in the money supply may just be saved, e.g. banks don’t increase lending but just keep more bank reserves.

• Inflation in Pakistan:

Inflation rate in Pakistan is discussed with regards of year 2015. Prices of some goods increased and some decreased. Over all, consumer prices in Pakistan increased by 1.61 percent year-on-year in October of 2015, following a 1.32 percent growth in the previous month, as cost of clothing (+5.11 percent against +4.60 percent in September) and furnishings and household equipment (+3.86 percent against +3.70 percent) rose at a faster pace. Additional upward pressure came from: housing and utilities (+5.32 percent); education (+8.75 percent) and communication (+0.39 percent). By contrast, prices of food (-0.42 percent) and transportation (-14.18 percent) continued to fall. Inflation Rate in Pakistan averaged 7.94 percent from 1957 until 2015, reaching an all time high of 37.81 percent in December of 1973 and a record low of -10.32 percent in February of 1959. Inflation Rate in Pakistan is reported by the Pakistan Bureau of Statistics.

Pakistan Prices	Last	Previous	Highest	Lowest
Inflation Rate	2.73	1.61	37.81	-10.32
CPI	204.22	203.03	204.66	68.32
Core Inflation Rate	4.00	3.4	11.4	3.4
GDP Deflator	243.75	237.00	243.85	100
Producer Prices	208.72	208.3	215.05	20.4
Export Prices	751.81	143.90	751.8	1.2
Import Prices	1398.5	152.00	1398.50	0.6
Food Inflation	1.33	-0.42	12.99	-1.06

 v Causes of Poverty:       

It is difficult to point out all causes of poverty in world but the major causes of are given below:

·         Government Policies:

Government of most of developing and under developed countries is not well aware of present conditions of country. The policies of government are based on the suggestions of officials which do not have awareness about the problems of a common man. After implementation the policies do not get effective result. After the failure of one policy, government does not consider its failure and announces another policy without studying the aftermaths of last one. Heavy taxes and unemployment crushes the people and they are forced to live below poverty line. The suitable medical facilities are not provided to people and they are forced to get treatment for private clinics which are too costly.

·         Corruption:

Another cause of poverty is corruption. There is not morality and everyone is trying to earn more and more by using fair and unfair means. Officials waste their time has low efficiency. Only one relationship that is exists in society is money. One has to pay a heavy cost to get his right. Law and order conditions are out of control and institutions are failed to provide justice to a common man. Justice can be bought by money only. But government is unable to control such type of things. In this whole scenario some corrupt people has been occupying the resources and common man is living in miserable conditions and this is causing poverty.

·Division of Agricultural Land:

Pakistan is an agricultural country. Most of people are farmers by profession. One has land which is fulfilling the needs of his family but he has to divide the land into his children when they got young. After division the land is not sufficient to support a family. Now the families of his children are suffering and spending their lives below poverty line.

• Materialism:

In our society social bonding are gradually becomes thinner and thinner. A race of material object has been started even no one tried to understand the problems of others. Everyone is gradually changing from human to a bio man which only know about his needs and have no concept about the limitations of others. People are not ready to help each other. At last everyone has lose his trust on others which affect our social and economic system and it is another cause of poverty.

• Lack of Education:

The literacy rate of Pakistan is very low. Most of people do not have any concept about the modern earning sources. Most people are unable to adopt technology for their business needs, that’s why business do not meet international standards and results as decrease in revenue which lead the society to poor financial conditions.

• Large Scale Import:

The import in developing and under developing countries is greater than export. Big revenue is consumed in importing good every year, even raw material has to import for industry. If we decrease import and establish own supply chains from our country natural resources the people will have better opportunities to earn.

• Law and Order:

There are lot of problems regarding law and order. Terrorist attacks create uncertainty in stock markets and people earning from stock are getting loss due to which the whole country faces uncertain increase in commodity prices.

• Fluctuated Foreign investment:

Foreign investor comes to local markets. They invest millions of dollars in stock markets and stock market gets rise in index. Then the investor withdraws his money with profit and market suddenly collapses. The after math always be faced by poor people.

• Privatization:

Government is unable to manage the departments and country has low reserve assets. So the meet the requirements some companies run by government are sold to foreign investors. The commodities or services provided by the companies are becoming costly. For example if government sold a gas plant then prices for gas in country rises.

• Moral Culture:

The main reason for poverty is the social dishonesty and irresponsible behaviour of people. Everyone is trying to get rich by using unfair means. A shop keeper is ready to get whole money from the pocket of customer. People doing jobs are not performing their duties well. In society the man considered brave or respectful who do not pay taxes or continuously violate the laws. This irresponsible behavior continuously increases and produces loss for county.

•    Side effects of Poverty and inflation:

Poverty and inflation are causing bad side effects all over the world and as well as in Pakistan due to huge differences in the wealth. Following are some of its side effects.

•       Social crimes:

It’s unquestionable that crime ranks high among the effects of 

poverty and inflation. As the prices rises and there is unemployment

in the country people do not have enough to feed their families so 

adults tends towards crimes and robbery for money. So, inflation 

and poverty are causing crimes.

• Health

One of the most severe effects of poverty is the health effects that are almost always present. This includes things from diseases to life expectancy to medicine. Diseases are very common in people living in poverty and facing inflation because they lack the resources to maintain a healthy living environment. Due to high prices of food and low income they are almost always lacking in nutritious foods, which decreases their bodies’ ability to fight off diseases. Sanitation conditions are usually very low, increasing the chance of contracting a disease. Sometimes these diseases can be minor, but other times they can be life-threatening. In general, people living in poverty cannot afford appropriate medicines due to higher prices to treat these illnesses.

• Terrorism:

It has become a common place in newspapers to blame poverty and inflation as fuelling terrorism by creating a state of misery and frustration. When there is inflation and people are poor and are facing poverty they get frustrated. This pushes people to join terrorist organizations. While this doesn’t seem a totally groundless accusation it makes sense and feeds the riches’ tormented conscience more and more research shows that the effect of poverty on terrorism is not that straightforward.

It’s important to note that most of the time terrorists do come from poorer countries with high unemployment, and that terrorist organizations often provide much higher salaries than any other job, if any other job is available at all. In fact, a lot of different factors interact with the decision to become a terrorist. Personal and cultural ideals, values, and principles are just as important as material and social gain (reputation & fame for fighting the imperialists) of entering terrorism.

• Malnutrition

The most common effect of poverty is malnutrition.

This is especially seen in children of poor families. People living in poverty and inflation rarely have access to highly nutritious foods. Prices of food items are very high and they do not have enough to spend on nutritious food. Even if they have access to these foods, it is unlikely that they are able to purchase them. The healthiest foods are usually the most expensive; therefore, a family on a very small budget is much more likely to purchase food that is less nutritious, simply because that is all they can afford. Sometimes people in poverty are malnourished simply because they do not eat enough of anything. A total of 14.3 percent of people in developing countries face hunger and about 25 percent of Sub-Saharan Africa is considered malnourished. Poor nutrition causes 45 percent of deaths in children under the age of 5. Malnutrition can also lead to many other health issues as well.

•   Child Labor:          

Ever since the 1960s, the share of children affected by poverty has only got bigger and bigger. Children are those who have the least choice and ability to change what happens to them. There isn’t much they can do to help their families, nor should they have to. Until they can stand firmly on their two legs, usually by the age of 6, then they can be enrolled willy-nilly in child labour. As their families have no proper earning source and due to inflation prices of goods are high so even they are unable to purchase their basic needs and this cause adults and children to earn for there living.

• Life expectancy:

Life expectancy and child mortality are greatly affected by poverty. Statistics show that life expectancy in poor nations is up to 30 years below that of wealthy nations, like the United States. Child mortality is shockingly high in poor countries; 13.5 percent of children die before the age of 5 in poor countries. This number is the average for poor countries, however some African nations have a child mortality rate of 20 percent.

• Education

Education is largely affected by poverty. Many people living in poverty are unable to attend school from a very early age. Families may not be able to afford the necessary clothing or school supplies. Others may not have a way for their children to get to school. Whatever the reason, there is a clear correlation between families living in poverty and their lack of education. Without the ability to attend school, many people go through life illiterate. The literacy rates in countries with high poverty levels indicate that these two are linked. Low literacy rates can affect society in various ways including the labour force and politics. Obtaining a basic education could bring 171 million people out of poverty. A bad cycle is created; poverty prevents people from gaining a good education, and not obtaining an education prevents people from escaping poverty.

• Economy

Among the effects of poverty and inflation includes its impact on the economy of the country. Mainly, the number of people living in poverty influences employment rates heavily. Without an education, people are unlikely to find a paying job. Unemployment hinders a country from developing into a strong economic system. A high unemployment rate can impede a country from progressing in all aspects. The labor force suffers when a large part of the citizens cannot contribute to economic development.

• Society

Poverty and inflation also has social effects. Many people living in poverty are homeless, which puts them on the streets. There also seems to be a connection between poverty and crime. When people are unemployed and homeless, social unrest may take over and lead to increases in crime. When people have nothing and no money to buy necessities, they may be forced to turn to theft in order to survive. Homelessness and high crime rates impact of a country’s people and can create many problems within a society.

It is clear that poverty has far-reaching effects on all people. By improving global poverty, economies could prosper, health could improve and countries can develop into strong global presences. All countries will benefit when decreasing global poverty becomes a priority in the world.

• Effects on Redistribution of Income and Wealth:

There are two ways to measure the effects of inflation on the redistribution of income and wealth in a society. First, on the basis of the change in the real value of such factor incomes as wages, salaries, rents, interest, dividends and profits. 

Second, on the basis of the size distribution of income over time as a result of inflation, i.e. whether the incomes of the rich have increased and that of the middle and poor classes have declined with inflation. Inflation brings about shifts in the distribution of real income from those whose money incomes are relatively inflexible to those whose money incomes are relatively flexible.

The poor and middle classes suffer because their wages and salaries are more or less fixed but the prices of commodities continue to rise. They become more impoverished. On the other hand, businessmen, industrialists, traders, real estate holders, speculators, and others with variable incomes gain during rising prices.

The latter category of persons becomes rich at the cost of the former group. There is unjustified transfer of income and wealth from the poor to the rich. As a result, the rich roll in wealth and indulge in conspicuous consumption, while the poor and middle classes live in abject misery and poverty. But which income group of society gains or losses from inflation depends on who anticipates inflation and who does not. Those who correctly anticipate inflation, they can adjust their present earnings, buying, borrowing, and lending activities against the loss of income and wealth due to inflation.

They, therefore, do not get hurt by the inflation. Failure to anticipate inflation correctly leads to redistribution of income and wealth. In practice, all persons are unable to anticipate and predict the rate of inflation correctly so that they cannot adjust their economic behaviour accordingly. As a result, some persons gain while others lose. The net result is redistribution of income and wealth.

• Salaried Persons:

Salaried workers such as clerks, teachers, and other white collar persons lose when there is inflation. The reason is that their salaries are slow to adjust when prices are rising

• Wage Earners:

Wage earners may gain or lose depending upon the speed with which their wages adjust to rising prices. If their unions are strong, they may get their wages linked to the cost of living index. In this way, they may be able to protect themselves from the bad effects of inflation.

But the problem is that there is often a time lag between the raising of wages by employees and the rise in prices. So workers lose because by the time wages are raised, the cost of living index may have increased further. But where the unions have entered into contractual wages for a fixed period, the workers lose when prices continue to rise during the period of contract. On the whole, the wage earners are in the same position as the white collar persons.

• Businessmen:

Businessmen of all types, such as producers, traders and real estate holders gain during periods of rising prices. Take producers first. When prices are rising, the value of their inventories (goods in stock) rise in the same proportion. So they profit more when they sell their stored commodities.

The same is the case with traders in the short run. But producers profit more in another way. Their costs do not rise to the extent of the rise in the prices of their goods. This is because prices of raw materials and other inputs and wages do not rise immediately to the level of the price rise. The holders of real estate’s also profit during inflation because the prices of landed property increase much faster than the general price level.

• Fixed Income Group:

The recipients of transfer payments such as pensions, unemployment insurance, social security, etc. and recipients of interest and rent live on fixed incomes. Pensioners get fixed pensions. Similarly the renter class consisting of interest and rent receivers get fixed payments.

The same is the case with the holders of fixed interest bearing securities, debentures and deposits. All such persons lose because they receive fixed payments, while the value of money continues to fall with rising prices.

Among these groups, the recipients of transfer payments belong to the lower income group and the rentier class to the upper income group. Inflation redistributes income from these two groups toward the middle income group comprising traders and businessmen.

• Equity Holders or Investors:

Persons who hold shares or stocks of companies gain during inflation. For when prices are rising, business activities expand which increase profits of companies. As profits increase, dividends on equities also increase at a faster rate than prices. But those who invest in debentures, securities, bonds, etc. which carry a fixed interest rate lose during inflation because they receive a fixed sum while the purchasing power is falling.

•  Agriculturists:

Agriculturists are of three types, landlords, peasant proprietors, 

and landless agricultural workers. Landlords lose during rising prices because they get fixed rents. But peasant proprietors who own and cultivate their farms gain. Prices of farm products increase more than the cost of production.

For prices of inputs and land revenue do not rise to the same extent as the rise in the prices of farm products. On the other hand, the landless agricultural workers are hit hard by rising prices. Their wages are not raised by the farm owners, because trade unionism is absent among them. But the prices of consumer goods rise rapidly. So landless agricultural workers are losers.

•      Government:

The government as a debtor gains at the expense of households who are its principal creditors. This is because interest rates on government bonds are fixed and are not raised to offset expected rise in prices. The government, in turn, levies less taxes to service and retire its debt.

With inflation, even the real value of taxes is reduced. Thus redistribution of wealth in favour of the government accrues as a benefit to the tax-payers. Since the tax-payers of the government are high-income groups, they are also the creditors of the government because it is they who hold government bonds.

As creditors, the real value of their assets decline and as tax-payers, the real value of their liabilities also declines during inflation. The extent to which they will be gainers or losers on the whole is a very complicated calculation.

• Conclusion:

Thus inflation redistributes income from wage earners and fixed income groups to profit recipients, and from creditors to debtors. So far as wealth redistributions are concerned, the very poor and the very rich are more likely to lose than middle income groups.

This is because the poor hold what little wealth they have in monetary form and has few debts, whereas the very rich hold a substantial part of their wealth in bonds and have relatively few debts. On the other hand, the middle income groups are likely to be heavily in debt and hold some wealth in common stocks as well as in real assets.

This unequal distribution of wealth leads towards poverty. So, governments should take useful measures to remove poverty from the society