Urban poor hard hit most by inflation: Studies

NEW DELHI: Inflation, often described as the cruellest tax because it erodes income, has been falling in recent months, but average price rise during and following the peak of the pandemic has been higher and more broad-based than in previous years, hitting the urban poor harder, two recent studies have shown.

Three components of inflation — food, fuel and core inflation i.e. price in all items minus food and fuel — have moved divergently. Food inflation fell significantly from above 5% at the start of the current financial year to 0.7% in September.

During the same period, fuel inflation rose from 8% to 13.6%. Core inflation, which leaves out volatile items such as food and fuel, remained sticky near 6%.

“Not only did they (inflation various components) diverge, but their burden also varied by income group, primarily because the share of spending on each of these commodity groups differs across income classes,” said Dharmakirti Joshi, chief economist, Crisil.

The bottom line of this is that although broadly everyone experienced the same inflation numbers, some groups – especially the urban poor – felt inflation’s heat more because they spend a larger share of their budgets on items that got costlier, such as fuel.

According to the Reserve

Bank’s bi-annual Monetary Policy Report for October, mean or average inflation this year has been higher and more broadbased. It has also been very volatile.

“These indicate high dispersion of inflation rates in the consumer price index basket, along with a larger number of items experiencing higher inflation rates than in the pre-pandemic period,” the RBI report said.

Crisil’s researchers engaged in an interesting study to disaggregate the impact of inflation on different income groups.

They segregated the population into three broad groups by expenditure — the bottom 20%, the middle 60% and the top 20% for urban and rural — using data from the National Sample Survey Organisation (NSSO).

Then, the expenditure share of each commodity group was mapped with the relevant inflation during the last and this fisin cal up to September 2021. They then used these weights to calculate the overall inflation for each class.

“We find that the urban poor felt the heat of inflation the most,” Joshi said.

While overall inflation declined for all income classes in FY2021-22 compared with the last fiscal year, urban poor (bottom 20%) bore the heaviest brunt in both time periods.

The key culprits were fuel and food costs, which have the highest weights for the bottom 20% of the urban poor. Urban inflation in these two commodity components was higher than that in rural areas.

The researchers used the NSSO’s Consumer Expenditure Survey of 2011-12, which offers the latest available data on monthly per capita expenditure (MPCE) across income classes. This data have also been used to calculate weights for the latest consumer price index 2011-12 series.

“The relatively higher food and fuel inflation in urban areas have meant the poor in that geography are facing more heat than their rural counterparts,” according to the Crisil Ltd’s study.

The rural poor did face considerable inflationary pressures too, the study shows. Cereals, fuel and vegetables are the top three spending categories within food for both rural and urban dwellers. The pressure from high fuel inflation may have been offset by lower price rise in food.

However, six out of the 10 commodities have seen inflation above 6% in rural areas this fiscal, Crisil observed.

In urban areas, there are five such commodities.

“This implies inflationary pressures are still significant for the poor.”

ACCORDING TO RBI, MEAN OR AVERAGE INFLATION THIS YEAR HAS BEEN HIGHER AND MORE BROAD-BASED