Inflation: Effect of Inflation on Poverty

In our previous Founder’s Thought, titled “Inflation: Effect of Inflation on Interest Rates,” we explored an incredibly powerful indirect effect of inflation, which was through the increase of interest rates. Yet, interests rates affect all classes as it increases the cost of debt. However, in today’s Founder’s Thought, we will explore a more direct effect of inflation and focus in on it’s specific effects on lower-income households and those in poverty.

Cost of Living

Most lower-income households live paycheck-to-paycheck, meaning that their financials are incredibly tight. In fact, many lower-income households actually live in debt as they are unable to keep up with their cost of living as credit card bills accumulate. The only that could make this snowball effect worse is if there is more snow for the snowball to pick up, meaning that the cost of their normal needs to live increases and their debt continues to compound itself. This is characteristic of inflation as groceries, gas, rent, utilities, phone bills, meals, and everyday items increase in price.

Income Erosion

As the price of their way of life increases, lower-income households are left in a compromised position as their income, naturally, does not increase alongside inflation, meaning that lower-income households need to address rising prices as well as accumulated and compounding debt while their already low wages stay the same. In essence, the purchasing power of lower-income households decreases with the rise of inflation. To make things worse, in a hostile macroeconomic landscape, many lower-income households may take wage cuts or lose their jobs as their employers feel the effects of inflation and rising prices.

Conclusion

Overall, there is no question that lower-income households suffer the most from inflation. Although, there is very little that those in poverty can do to improve their financial situation, a big step they can take is to financially educate themselves to prevent things, such as the compounding of debt that may occur on credit card bills.