Rising inflation hurts the poor in cities more than in rural areas

The impact of elevated prices of vegetables, edible oils and petroleum products tend to be disproportionately higher on poor households. This is because food and energy costs make up a bulk of the expenditure of these households. An analysis by rating agency Crisil found that the urban poor felt the pinch of rising inflation more than any class of households, even though the rise of the headline consumer inflation number was more rapid in rural areas.

Urban poor refers to the bottom 20 percent of the population in urban areas, determined by their income and monthly per capita consumption expenditure, and include the vast population of the migrant workers in the cities across the country.

The consumer price index (CPI) based inflation for January 2022 printed 6 percent higher, from a year ago, driven by higher prices of edible oils and petroleum products among others, and breached the Reserve Bank of India’s comfort band. Overall, the CPI rose at a faster rate of 6.1 percent in rural areas compared to 5.9 percent in urban areas, data published by the National Statistical Office show.

In a note analysing the January CPI, Crisil team led by its chief economist DK Joshi wrote, “The effective inflation for the urban poor rose to 6.3 percent in January from 6.2 percent in the previous month.” In contrast, the inflation felt by the top 20 percent of households in urban areas was estimated at 5.9 percent, at the same level as in December 2021.

The analysis also pointed out that even as inflation rose more rapidly in rural areas, the top 20 percent of households felt the pinch more than the lower-income groups. The inflation for this set of households climbed 6.2 percent compared to 6.1 percent for the rest in rural areas.

Significantly, the urban poor has been the worst affected by the rising inflation not just in January, but also in the first half of the current financial year as also 2020-21, per Crisil estimates. The CPI inflation experienced by the urban poor in the first half of the current financial year was estimated at 5.6 percent compared to 5.2 percent for the same class in rural areas and 5.4 percent for the top 20 percent urban households.

In 2020-21, when the country was under lockdown for several months and many faced income losses, the CPI inflation experienced by the urban poor was estimated at 7 percent, compared to 5.9 percent for the corresponding income class in rural areas and 6.4 percent for the urban rich.

The Crisil economists used the National Sample Survey Organisation’s Consumer Expenditure Survey of 2011-12 to estimate the average expenditure pattern across three broad income groups. That was the last survey report made public by the Ministry of Statistics and Programme Implementation (Mospi). The Consumer Expenditure Survey is also used to calculate weight for all the items that are taken to construct the CPI. The expenditure patterns would have seen some change over the last decade, but it may not be significantly different.

Cereals, fuel and light, vegetables and beverages are among the top expenditures of the bottom 20 percent of all households in both rural and urban areas, with food and beverages being the largest component of household expenditure. Cereals accounted for 18.3 percent of the total expenditure of the rural poor and 14.5 percent for the urban poor, per estimates of the 2011-12 consumer expenditure survey.

However, cereals have not been a significant contributor to inflation in January 2022, CPI data published by the NSO shows. The rise in cereal inflation – 3.7 percent in rural areas and 2.9 percent in urban areas in January 2022, from a year ago – was relatively benign compared to many other items in the consumption basket. Further, the distribution of free foodgrain under the Pradhan Mantri Garib Kalyan Yojana gave a large section of the poor households some respite during the pandemic. The distribution will continue till March 2022.

The CPI data shows that the poor, particularly the urban poor, would have been hurt by the rise in prices of vegetables and edible oils, elevated prices of fuel and light and a rise in telecom tariffs.

The rise in energy costs hurt households in both rural and urban areas. Fuel and light inflation was estimated to have climbed 8.4 percent in January 2022, from a year ago, in rural areas and at a higher rate of 10.8 percent in urban areas.

For urban households, the sharp rise in vegetables was also a big setback, given that they have to be bought from the market unlike in rural areas where households grow some vegetables for self-consumption. Vegetable price inflation in urban areas was recorded at 11.5 percent in January 2022, from a year ago, compared to a mere 1.4 percent rise experienced by rural households. Vegetables accounted for about 8-10 percent of the total expenditure of the poor households in 2011-12 consumer expenditure survey.

Edible oil prices were much higher in January 2022 compared to a year ago though they have come off their peaks levels seen in October-November 2021 following policy interventions. The rise in inflation of oils and fats was estimated at 20.6 percent in rural areas and 15.2 percent in urban areas, from a year ago.

The rise in transportation and communication costs was higher in urban areas, where they climbed 10.5 percent in January 2022, from a year ago. The rise in rural areas was estimated at 8.3 percent.