Countrywide data on inflation and income inequality show that these two concepts have a non-linear and asymmetric relationship.
On the one hand, an increase in inflation, up to the threshold level, reduces income inequality and then it increases. For example, the inflation rate declined as household incomes increased in the United States recently. On the other hand, even during inflationary times, higher than the threshold limit (like the situation in Iran), the rate of growth in inequality with a certain increase in inflation is different from the fall in inequality with the same decrease in inflation.
What has been less surveyed in Iran’s economic literature regarding inequality and inflation is the different effect of inflation on different deciles or income classes, which is known as the inflation gap between the rich and the poor, or more precisely, inflation inequality. Mehdi Feyzi, an economist, prefaced his article for the Persian economic daily Donya-e-Eqtesad with this note. A translation of the text follows:
Consumer inflation follows the changes in price of the average consumption basket of households. It shows how households across society are affected by price increase on average. However, households face different inflation rates because the patterns of their spending and habits are different. In other words, prices change at different rates for people in different parts of the income distribution.
For example, while the sharp increase in fuel prices in the European Union these days has increased inflation, a household that does not have a car is less affected in actuality than a family that has a car.
In times of economic uncertainty and recession, most households tend to refrain from buying luxury goods given the high income elasticity. But in general, people cannot reduce their essential needs for food and heating. As low-income households spend a larger percentage of their income on necessities, the shift in spending makes inflation higher for poorer households than for richer ones. On the contrary, inflation inequality is expected to decrease during economic growth.
Different Rich-Poor Reactions
The different effects of inflation can be measured not only in different income deciles, but also at the provincial or urban or rural levels. In a research in the fiscal 2010-11, Kafaei and Moradbeigi calculated the inflation inequality in Iran across provinces and showed that this inequality is generally more severe in urban areas than in rural areas, but the overall intensity of inequality has increased in recent years.
A study by Azarbaijani et al. in 2021-22 entitled “Inflation Inequality and the Effect of Household Reaction on Its Impact: Iran Case” also shows that the difference in the consumption patterns of households in different income deciles and their different reactions to inflation show that the inflation felt by the poor is higher and that experienced by the rich is lower than the average inflationary effect. Therefore, as wages are adjusted by the average inflation, poor households become worse affected and the state of rich households improves in inflationary times.
In other words, the government’s inflation tax puts pressure on the poor households, while it improves the condition of rich households.
Inflation boosts the value of assets of some groups and consequently their wealth, so the rise in income outweighs the rise in expenses. Inflation only increases the expenses of those who don’t have any assets. Their income does not increase in line with expenses and therefore low-income households bear the brunt of inflation.
Unskilled workers as a group not only face the highest inflation on average, but the inflation raises their consumption expenses much more than their income.
The economic recession of recent years and uncertainties in Iran’s economy have increased inflation inequality, which shows its effect in the income inequality index. The precise measurement of this relationship requires price and micro-expenditure data due to aggregation bias. Households’ income and expenditure data, which is collected every year by the Statistical Center of Iran, is a helpful source for these calculations.
Neglecting inflation inequality has serious consequences for our understanding of the dynamics of poverty, income inequality and the effectiveness of fiscal policies. Understanding the difference in the impact of monetary policies in different regions of the country shows that a policymaking based on average indicators, such as inflation, when the range of changes in the index (variance) is very significant, fails to have a positive effect. It also worsens the indicators in extreme cases (like the situation of the less-privileged people) even if the state of the society improves on average.
Inflation in Income Deciles Reported by SCI
The average annual inflation gap measured by the Statistical Center of Iran among income deciles stood at 8.5% in the eighth month of the current Iranian year (Oct. 23-Nov. 21), up 0.6 percentage points compared to the previous month, the SCI’s reported recently.
The inflation gap in “food, beverages and tobacco” group among income deciles grew by 0.7 percentage points and that of “non-food and services” group increased by 0.2 percentage points compared with the previous month.
The average goods and services Consumer Price Index in the 12-month period ending Nov. 21 increased by 50.2% for the first decile (those with the lowest income) and grew by 41.7% for the 10th decile (those with the highest income).
The annualized inflation of “food, beverages and tobacco” stood at 64.6% for the first decile and 60.9% for the 10th decile. “Non-food and services” inflation was reported at 33% for the first decile and 36.6% for the 10th decile.
Average annual inflation rates stood at 48.6% for the second decile compared with last year’s corresponding period; 47% for the third decile; 46.2% for the fourth; 45.2% for the fifth; 44.6% for the sixth; 45.2% for the seventh; 44.6% for the eighth and 43.9% for the ninth decile.
The highest overall CPI (using the Iranian year to March 2017 as the base year) stood at 586.1 for the second decile and the lowest was 553.7 for the eighth decile.
The first, second and third deciles each saw a month-on-month inflation of 1.8%, the fourth and fifth deciles each registered 1.9%, the sixth and seventh deciles each registered 2%, the eighth decile registered 2.1%, the ninth decile registered 2.3% and the 10th deciles each registered 2.5%.
The year-on-year inflation rates stood at 56.2% for the first decile, 54.3% for the second, 52.6% for the third, 51.6% for the fourth, 50.4% for the fifth, 49.7% for the sixth, 48.4% for the seventh, 47.1% for the eighth and 45.7% for the ninth and 43.1% for the 10th decile.
