Inflation Affects Poor More Than Rich
RBI has decided to pause the interest rate hike, which indicates that the central bank thinks the inflation might have peaked. While inflation is currently high at slightly over 6%, we Indians are quite used to that kind of inflation anyway. For most of the western world, it is causing a lot of pain. Not just the inflation but the rate hikes by their respective central banks. The rate hikes even affected some banks (think SVB for example). High inflation is a problem for everyone, but it hurts the poor a lot more than the rich. Yet the media makes it sounds like everyone is affected the same way.
You see, when some one says that the inflation is 6%, it means the prices have gone up by 6%. So unless your income grows by 6%, you cannot buy the same amount of things. But is it really true? Well, it is only true if you are using all your income to buy the things you need. Which is the case with most poor. They live pay check to pay check. Even if you are earning a lot, you can be considered poor if you are spending all your income.
Then there is the other factor which is that inflation is not the same for everyone. For some, inflation could be higher than 6% and for others it could be lower. Take for example if food inflation is 4% but school expenses are 20%, then if I am spending mostly on school fees, then my inflation will be higher than a person who mostly spends on food. Now going back to the point about the rich vs poor. Assuming the government published CPI number applies to everyone equally, the inflation will affect the poor more than rich.
Lets work out an example. Say, my income is Rs. 50K per month and I spend all of it on my expenses which may include rent, school fees, food, medicine, utility bills etc. Suppose next year my expenses have inflated by 6% then my expenses will be Rs. 53K and unless my income also grows by 6% I will be in trouble assuming I cannot reduce my expenses. Now consider another person who is a good saver and while he earns the same Rs. 50K, he only spends Rs. 25K. Then after inflation, his expenses will be Rs. 26.5K. For that person, the increase in income need not be 6% assuming he wants to keep the expenses and savings the same. The income only needs to go up by 3%. That is why inflation affects the poor more than the rich. May be I should call the rich as good savers or frugal investors.
But even if you are not a saver and just have a lot more money which gives good returns, and you spend quite a bit lower than your returns, then too the inflation will not affect you as it does for the rest. The important thing to remember here is that if you are a low spender or a high saver, you will be better off. There are many things that are involved in calculating your inflation and how your income needs to grow. However, if you just take expenses and saving as the variables, then your income needs to grow according to the equation
Income growth = ((1 + Inflation) x Expenses + Savings) / Income - 1
We know that
Income - Expenses = Savings. Hence the equation becomes
Income growth = ((1 + Inflation) x Expenses + Income - Expenses) / Income - 1 Income growth = (Inflation x Expenses + Income) / Income - 1 Income growth = Inflation x Expenses / Income
Since spending rate is
Expenses / Income the equation can be simplified to
Income growth = Inflation x Spending rate
Basically, the equation is telling you that the more you spend, the closer your income needs to grow with inflation. If you are spending 100% of your income, your income has to grow at 100% of inflation. If you are spending 50%, then your income only needs to grow by 50% of inflation. Spending habits have a profound impact on many aspects. It affects your saving rate, your personal inflation, required income growth and also your early retirement date. Spend less and be rich :).