The increasing prices of goods and services we now face are the result of the high crude oil prices, which never seem to fall. They only continue to break price records on a seemingly daily basis. This has caused the cost of living to skyrocket, destabilizing our economy, and hindering economic growth.
Of particular interest is whether rising inflation affects everyone equally, or whether it affects one sector of society more than others.
Inflation affects the poor rather than the rich
Table 1 compares the 2007 inflation rate (including the consumer price index) with that in the same period last year. The Table also includes data on the general consumer price index and the basic consumer price index, both which influence the prices of consumer goods and services throughout Thailand. These data indicate that people in the lower income brackets have a much higher price adjustment than people in higher income brackets.
Table 1 Changes in the consumer price index in 2007 (% compared to the same period last year)
1General consumer price index
1.1 Food and drink
2.Basic consumer price index *
3.Low-income price index
3.1 Food and drink
4.Upcontry consumer price index
4.1 Food and drink
*Basic consumer price index is the general consumer price index without the prices for fresh food and energy added.
Source: Bank of Thailand
This chart reveals that the consumer price index for food and drink has risen much faster than the price index for other items. Rapidly rising inflation is fueled mostly by the skyrocketing prices of food and drink. These would affect people in the rural (upcountry) areas much more than people living in urban areas. Let me explain.
Why do low-income people suffer a greater impact from inflation?
We must first go to the principle of Economics and define the concept of marginal propensity to consume (MPC). MPC is calculated by dividing the amount expenses have changed with the amount income has changed. That is, if peoplersquo;s income changes by 1 unit, how much will they change their consumption expenses?
Generally, the MPC for people in the low income bracket is higher than that for people in the high income bracket. For example, a rich person earns 100,000 baht per month and consumes 90,000 baht per month; whereas, a poor person earns 1,000 baht per month and consumes 900 baht per month. If both earn 10% more, the rich person will consume 4,000 baht extra, or 4.0 baht extra for every 1 baht extra, where as, the poor person will consume 70 baht extra, or 0.7 baht extra for every 1 baht extra.
High inflation, resulting in higher prices for goods and services, means the real incomes of people decreases. That is, people have lower purchasing power because their incomes are the same as before but the prices of goods and services are higher; consequently, their money can buy a decreased amount of goods. The poor tend to have higher marginal consumption than the rich; therefore, inflation will affect the poor to a much greater degree than it will affect the rich. This is because inflation will lower the amount of their consumption much more than it will for people in a higher income bracket.
Simply put, although the prices of goods are higher, people in a higher income bracket will not get into so much trouble because the rich usually manage to buy necessary goods, luxury goods (not necessary for daily life), and invest in savings. When inflation lowers the consumption standards of the rich, it will not affect their necessary consumption. They can decrease their unnecessary spending in order to buy necessary goods and, in the process, maintain their necessary consumption.
However, people in a lower income bracket are different because almost all of their income is already designated for necessary goods. Therefore, inflation will lower their necessary consumption because they do not have other savings to compensate for their decreased spending power. This is the reason the poor suffer much more when inflation increases.