The impact of food and non-food inflation on poverty: A case study of Sri Lanka

Abstract

Introduction Poverty has become a major concern among the economists and policy makers as it limits the access to basic needs of poor. Since poor people have lack of power in the political and the decision making process, they are generally exposed to misuse by society and state. Poor people often suffer by economic shocks, especially from unpredicted rise in rate of inflation. Therefore, if there is any crisis in the economy, poorer has to pay higher prices than the richest people, whereas they gain generally less compared to rich during the economic booms. In this background, some people prefer inflation than the deflation while other people prefer very low inflation or even deflation. Inflation tends to smash poorest in the society while it badly affects the savings of middle class. In general, a moderate inflation does not necessarily increase poverty but higher inflation will lead to increase it. Chani et al. (2011) identified a positive and significant relationship between inflation and poverty in the long run and the short run for Pakistan. Choi et al. (1996) confirmed that inflation hits more harshly to poor than the rich and higher income people. Bruno and Easterly (1998) also invented that poor household get more benefits than the rich when there is stabilization policies to control inflation. Gylfason (1998) and Easterly (1993) found that high economic growth and low inflation tend to decrease poverty. Using the Philippines data, Fuji (2011) showed that poor are vulnerable to the food inflation. When we look at the Sri Lankan context, there is a lack of quantitative studies in the area that investigate the relationship between rate of inflation and poverty. This motivated us to do the quantitative assessment between these variables. In this study, we partition inflation rate into two namely food and non food inflation to address above issues.