3.3. Poverty and inequality

Ì The poverty and distributional impacts of prices increase

Recent inflation, especially increases in food and fuel prices, is reducing the real purchasing power of all households in the region although the effects vary across the distribution depending on household consumption patterns and the extent to which prices for different goods and services have increased. Since poorer households tend to spend a larger share of their budgets on food, they are more vulnerable to food price increases (box 7). Conversely, richer households consume a larger share of non-food items and are thus more susceptible to non-food inflation. in developing EAP countries, food consumption shares range from 45 to 78 percent among households in the bottom quintile, compared to 27 to 51 percent for those in the top quintile (figure 66). in some countries, poor farmers are more likely to consume their self-produced crops and livestock (as in Lao PDR) and, thus, they may be less affected by increases in food prices; they may even benefit from higher prices if they lead to higher agricultural profits.

Analysis of the CPI by component and by household quintile illustrates how impacts of recent price increases differ within the EAP region and across the welfare distribution. Higher food, fuel and transportation costs are the main drivers for the recent inflation (figure 67A), while the magnitude of price increases significantly differs across the EAP countries, which is in part related to the varying government responses to the price hike. Taking into account quintile-specific consumption baskets, overall inflation experienced across the welfare distribution varies, though substantially only in a few of the countries analyzed (figure 67B). in indonesia, the bottom 20 percent experienced inflation that is 0.8 percentage points higher than the top 20 percent, as inflation is largely driven by food prices and utility and fuel prices have been contained. instead, Lao PDR’s richest quintile experiences inflation that is 2.6 percentage points higher than that of the poorest quintile, both because the poor rely largely on their own production of foodstuff and because the price of transport (which represents a significant share of the rich’s budget) rose the most. in other countries, differences in quintile-CPis are not large.

The welfare losses associated with higher inflation have been substantial in most countries. Based on the latest data on inflation (y-o-y)19, simulation analysis suggests that household purchasing power has declined substantially in all six countries studied – by 5.5 percent, on average – with considerable variation across countries (figure 68A). in Mongolia, welfare losses are around 11 percent, driven by more expensive food imports as well as rising transportation costs due to prolonged border frictions with China. in contrast, in Vietnam with relatively subdued food and energy inflation, household purchasing power losses are more limited (only 1.7 percent). in Lao PDR, household purchasing power losses are significantly greater among wealthier than poorer households, reflecting greater shares of purchased food and transportation among the wealthy. While the estimated impacts on poverty depend on the existing levels of poverty before simulated price increases, the analysis suggests that poverty could increase by 0.2 to 3.4 percentage points using the lower-middle-income poverty line ($3.65 per day, 2017PPP) and 0.9 to 8.3 percentage points using the upper-middle-income poverty line ($6.85 per day, 2017PPP) (figure 68BC). impacts on inequity measured by Gini coefficient appear to be limited, however, except in Lao PDR where larger losses in purchasing power among wealthier households have actually narrowed the income gap between the rich and the poor (figure 68D).

19 Simulations based on the latest available actual consumer price changes (yoy) by components (food, alcohol and tobacco, utility and energy, transportation and others), considering the household -specific consumption basket in the survey year. Therefore, both direct and indirect short-term effects of higher prices on welfare are considered. The simulation assumes that there are no price impacts on own-food consumption. Potential household income effects and changes in consumption behavior due to price increases are not modelled.