How Does The Current High Inflation Affect the Poor In Pakistan?

Inflation is back, badly affecting the emerging market and developing economies, including Pakistan. Currently, inflation exceeds the established targets in Pakistan and more than half of the developing economies with an inflation-targeting framework.

Rising inflation poses a significant challenge for many poor, middle, and lower-middle-class households in Pakistan. Indeed, rising inflation has become the top news in Pakistan, as the current wave of inflation has reduced the value of wages and real savings of households. Besides, it has also increased household poverty. However, the shocks may not affect all in the same way: high inflation has the worst impacts on low- and middle-income households than on the richest. This ultimately reflects their income, assets, and consumption baskets’ composition, which are the focal point of this blog.

The High Inflation Badly Affects the Poor Households In Pakistan

Composition Of Income

Households with low- and middle-income in Pakistan rely more heavily on wage income and transfer payments than more affluent people. Inflation often slows down wage and transfer growth, while income from self-employment and investment is more likely to keep pace with inflation. It means inflation can badly affect the income of the middle and lower-middle-class households than the richest.

In Pakistan, income emerging from self-employment and investment accounts for a larger share of income in high-income households than in low- and middle-income classes. Nevertheless, non-monetary income is also a dependent factor for the poorest families.

Composition Of Financial Assets

Financial products can protect the poorest households against inflation, but they often lack access. Financial products in Pakistan may have upfront or ongoing costs, making them unaffordable for needy families.

Unlike the developed economies like the United States, an overwhelming majority of households in Pakistan do not have not checking or transaction accounts at banks or any financial institutions. Therefore, they have no savings or investment products.

Furthermore, the distribution is highly imbalanced, which is among the top news for Pakistani media. The wealthiest category in the country is around five or more times more likely than the poorest to have certificates of deposit, savings bonds, or mutual funds.

High inflation has led to inequality and poverty in Pakistan by badly affecting the income and savings of the poor, lower-middle, and middle-income households. Even in big cities like Karachi, households that have recently gotten rid of poverty could fall back into poverty due to the current high inflation situation.

Composition Of Consumption Baskets

Poorer, lower-middle, and middle-income households in Pakistan may experience higher inflation rates in the coming days. A basket of goods representative of the average consumer is used to calculate consumer price inflation. Nevertheless, the actual spending composition of households varies significantly by income group. The lowest-income families in Pakistan spend around half of their income on consumption baskets. And this figure is around 20% for the highest-income households.

The food and energy prices in Pakistan have overwhelmingly increased during the last few years. This high inflation could significantly affect the poorest, lower-middle, and middle-income households. The economic crisis may not affect high-income households considerably because they can easily replace higher-quality goods with lower-quality goods. Besides, these households can also benefit from discounts on their purchases. Unfortunately, poor households do not have these beneficial options.

In Pakistan, food price spikes benefit a large segment of the poor, as more than a fifth of households are net food sellers. Nevertheless, the vast majority of these households in the country remain net food buyers. Overall, rising food prices tend to increase the poverty level.

What Can The Government Do?

The government can focus on subsidies to dampen the impact of inflation on households.

Policy-makers can also develop social welfare policies to protect the households from rising inflation.

They could include targeted safety nets, such as food, school feeding programs, public works programs, and more.

Central banks can curb inflation by improving households’ access to financial products that might protect the poor’s real value of their assets against inflation.

Final Words

The rising inflation in Pakistan has badly affected many households belonging to the poor, lower-middle, and middle class. It’s up to the policy-makers how they can handle the current worst situation of inflation, resulting in the rising prices of even life-necessity goods in the country.

Stay tuned with Pakistan Observer to get Pakistan’s latest news. We always strive to keep you all informed about the country’s economic, social, and environmental situations.