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Can the Poor Cope?

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  • The poor person’s price index shows that in most countries poor people face an effective inflation rate nearly 3 percentage points higher than the overall rate.
  • Most people in Central American countries will be adversely affected by food price increases regardless of whether they live in urban or rural areas or are poor or nonpoor.
  • Safety nets and other social protection programs can also help protect poor people’s human capital investments and other productive assets in the short to medium term.

Understanding the impact of food price inflation on the poor requires an examination of the situation and response of households. Households are not passive in the face of food price increases. Their response is driven by both consumption and production substitution effects, with production substitution effects more likely to be uneven because of constraints that impede smooth adjustment in supply responses. Even poor households may have risk mitigation strategies—for example, relying on multiple sources of income that permit labor supply to be rapidly increased. Subsistence farmers may be somewhat insulated from global market phenomena. Substitution effects and risk mitigation strategies not only determine the pass-through from international to local prices but also shape public policy intervention impacts. For example, explicit subsidies may affect factor allocations and therefore real wages and supply responses.

Any assessment of the impact of food prices on the poor needs to go beyond the analysis of global price trends—for four reasons. First, government price policies, trade restrictions, transportation costs, and oligopoly power mean that changes in world food commodities prices do not automatically translate into parallel trends in domestic food prices. Second, the impact of changing food prices varies according to diet in each country, so analysis needs to be based on country-specific data. Third, within each country poor people spend more of their overall budget on food than the average citizen. Consequently, they are more affected by changes in food prices. Fourth, commodity prices are not the only component of consumer prices; processing, transportation, and marketing account for a substantial share of final consumer prices.