Inflation and Income Inequality: Is Food Inflation Different? By;James P. Walsh and Jiangyan Yu

I. INTRODUCTION AND BACKGROUND
Rapid growth in developing countries, and especially in China and India, has led to an important
decline in poverty both at the national level and, due to the large size of China and India, at the
global level as well. However, in many emerging markets income inequality has risen as more
open and market-oriented economies have increased profits and potential wages, particularly for
skilled labor. At the same time, rapid growth has pushed up commodity prices around the globe,
raising questions about whether a seemingly inexorable rise in food prices is aggravating the
problems faced by the poor around the world. While inflation is often seen as aggravating
poverty and worsening the income distribution, distinguishing between food and nonfood
inflation could be of merit. Higher food prices can hurt the wellbeing of many poor people,
particularly in urban areas, but may benefit producers, reducing poverty among some in rural
areas. Based on datasets of food and nonfood prices available at the global level, as well as at the
subnational level for Chinese provinces and Indian states, the analysis below attempts to
distinguish between the effect of food and nonfood inflation on changes in income inequality.
The relationship between inflation on the one hand, and poverty and income inequality on the
other, remains unsettled in the literature, though many find that inflation generally worsens
inequality. Romer and Romer (1999) look at the incomes of the poor and show that both in the
U.S. and globally, higher inflation in the short run when accompanying economic growth can
support the incomes of the poor, but in the long run, by adding to economic uncertainty, it can
depress both average incomes and the incomes of the poor. Easterly and Fischer (2000), looked
at a very large sample of household survey data across a wide range of countries and found the
poor were more likely than the rich to cite inflation as a problem, and that inflation……Click here to read Inflation and Income Inequality

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