The rich have lower inflation. How is this possible?

17.02.2017 09:28|Conotoxia.com

Bad news for those who earn below the domestic average. According to the Central Statistical Office of Poland (GUS), January’s inflation in Poland was at the highest level it has been in four years. However, what’s even more concerning than the general increase of prices are food prices, which increased by as much as 3.3. percent compared to last year. This will affect those who are less wealthy the most – commented Marcin Lipka, Cinkciarz.pl senior analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

The rule of thumb is: the richer the country, the less money that it’s citizens pay for food. According to the studies of the United States Department of Agriculture (USDA) , Americans spend an average of 6.6 percent of their budget for meals at home, Germans – 10.2 percent and Nigerians – 56.6 percent of their budget.

In the basket of an average Pole, food and drinks made up around 24 percent of the average income in recent years. And according to GUS, even though this data differs from the statistics provided by the USDA (17.2) or Eurostat (a bit below 20 percent), they tend to confirm that wealth has a key part to play in the spending structure of a home budget.

What’s also interesting is not even differences between particular countries, but the disposition of the spendings within the country. It affects the way we react to price changes in reflection of the actual inflation level, as an average or a statistical household practically does not exist.

Higher pay means lower inflation

Different levels of the price changes that are affecting households are often a result of the fact that a higher cost of goods purchased a few times a month (e.g. food) is remembered better than the differences in the prices of the durable goods (e.g. TV, furniture). However, sometimes the convictions of a part of society regarding the inflation being faster than the officially published data is reflected in the facts.

A very good report to confirm this insight is the data presented by the British Office for National Statistics (ONS). The report entitled, “Variation in the inflation experience of UK households,” reads that during the years of 2003-2013, an average annual increase of the prices in the UK was at the level of 2.6 percent.

However, if we look close at the average inflation for those 10 percent who are spending the least, we will see that it was 2.3 percent through the examined decade. However, for those 10 percent of the least wealthy British people, it was 3.7 percent – more than half. From 2003 to 2013, the cost of goods and services increased by 29 percent for the wealthiest and 44 percent for the least wealthy. Where do those huge differences come from?

Given the smaller income, people tend to spend a relatively large amount of money for food and accommodations, and less for dining out and hotels. In the examined decade, the prices of food and utilities increased significantly which is what caused such dramatic differences.

Poland resembles the UK, unfortunately

Even though Great Britain is a developed economy, and Poland is an emerging one, the inflation process within the two are actually quite alike. The average annual inflation level for the years 2004-2016 in our country was at the level of 2.1 percent. However, during that time prices in the ‘food and non-alcoholic drinks’ category rose by 2.9 percent each year, and the cost of housing and the energy carriers increased by 4.1 percent.

According to the report by the Central Statistical Office of Poland entitled, “Household budgets in 2015,” published in September of 2016, 20 percent of the least wealthy spend 53.6 percent of their total expenditures for food and housing. For the wealthiest 20 percent however, those categories make up only 36.3 percent of the inflation basket.

Since 2004, the spending basket for the aforementioned group got more expensive by 26 percent only due to the cost of housing and food. For the richest, this figure is only 18 percent. This clearly shows that a different perception of price changes by various groups of society are not only a psychological issue, but are also reflected in the facts.

As a result, the fastest increase in food prices in years and housing costs that increase will more significantly lower the purchasing power of those with incomes below the national average. On the other hand, those who earn the most will not be affected by those changes to as great an extent, as their share in their spendings is relatively limited.

 


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