NEW DELHI: Inflation, at first glance, might seem like something that hits everybody. That’s misleading. The truth is that inflation typically hits the poor much worse than anybody else.
Applying a little common sense should make it clear why this is the case. When prices are generally rising, whether you gain or lose from it depends on whether the prices of things you sell are rising more than prices of things you buy.
For a trader, therefore, if his selling prices are rising faster than those at which he buys, his profit margins are increasing, not shrinking. A similar logic would apply to industrialists.
But what of those who only sell their labour and buy all that they need to subsist ? You might say, wages rise too in an inflationary period. But wages are typically the last to go up in response to the increasing cost of living. There is thus a lag in which incomes are struggling to catch up with expenditure.
In India, it might seem inaccurate to describe the poor as those who have nothing but their labour to sell. After all, there are hundreds of millions in the peasantry who are quite poor. Don’t they gain when prices of what they produce — wheat, rice and the like — go up? Unfortunately, not quite. The fact is that the majority of India’s rural population is either landless labourers or small and marginal farmers with tiny tracts of land to cultivate. The bulk of them are net buyers even of agricultural produce. Thus rising farm output prices do not help them.
The situation is made worse by the fact that such farmers would tend to do the bulk of their selling at harvest time, when prices of their produce are relatively low and buy the same thing later in the year when prices are higher.
Another reason why the poor are worst hit by inflation is the fact that they obviously have little or no savings. They also have little or no consumption that is dispensable . The only way they can cope with higher prices, therefore, is to cut back on essential consumption. When the inflation is driven by food prices — as is currently the case, at least partly — the impact on them is particularly bad since food forms a much larger part of their consumption basket than for the relatively better off.
In effect, thus, inflation acts as a sort of invisible hand that takes incomes away from the pockets of the poor and deposits them in those of some of the rich.
Applying a little common sense should make it clear why this is the case. When prices are generally rising, whether you gain or lose from it depends on whether the prices of things you sell are rising more than prices of things you buy.
For a trader, therefore, if his selling prices are rising faster than those at which he buys, his profit margins are increasing, not shrinking. A similar logic would apply to industrialists.
But what of those who only sell their labour and buy all that they need to subsist ? You might say, wages rise too in an inflationary period. But wages are typically the last to go up in response to the increasing cost of living. There is thus a lag in which incomes are struggling to catch up with expenditure.
In India, it might seem inaccurate to describe the poor as those who have nothing but their labour to sell. After all, there are hundreds of millions in the peasantry who are quite poor. Don’t they gain when prices of what they produce — wheat, rice and the like — go up? Unfortunately, not quite. The fact is that the majority of India’s rural population is either landless labourers or small and marginal farmers with tiny tracts of land to cultivate. The bulk of them are net buyers even of agricultural produce. Thus rising farm output prices do not help them.
The situation is made worse by the fact that such farmers would tend to do the bulk of their selling at harvest time, when prices of their produce are relatively low and buy the same thing later in the year when prices are higher.
Another reason why the poor are worst hit by inflation is the fact that they obviously have little or no savings. They also have little or no consumption that is dispensable . The only way they can cope with higher prices, therefore, is to cut back on essential consumption. When the inflation is driven by food prices — as is currently the case, at least partly — the impact on them is particularly bad since food forms a much larger part of their consumption basket than for the relatively better off.
In effect, thus, inflation acts as a sort of invisible hand that takes incomes away from the pockets of the poor and deposits them in those of some of the rich.
