Cost-of-living crisis lingers on despite declines in inflation

High prices of essential goods and services have become a pressing issue for the poor and vulnerable in Asia and the Pacific despite decent economic growth and declining inflationary trends so far in 2024.

This cost-of-living crisis since the onset of the war in Ukraine in 2022, particularly for food and fuel, is eroding purchasing power of people in the region and exacerbating poverty and inequality concerns, which came to the fore with the breakout of the Covid-19 pandemic in 2020.

Alarm over persistent high prices

The Economic and Social Survey of Asia and the Pacific 2024, published by ESCAP, sounds the alarm: while economic growth in the region has remained broadly resilient, the prices of essential commodities have soared in recent years. Indeed, the average prices of goods and services for the developing Asia-Pacific region were 17 per cent higher in 2023 as compared to 2020. This regional figure masks even sharper price rises in some countries, with South Asian economies, for example, experiencing an average price rise of 64 per cent. This has severe adverse implications for inclusive and sustainable development in the region.

Wages not keeping up with prices

This rise in prices is particularly concerning because real (inflation-adjusted) wages have not kept pace, leading to a decrease in purchasing power of people.

The real value of national minimum wages, the wage rates which are most relevant for the poor, have declined by 15 per cent between 2021 and 2022 for the twenty developing Asia-Pacific countries with available data. Although there has been some decline in inflation in 2023 and 2024 in the region, the fundamental challenge of high prices and lower real wages continues to persist.

Millions pushed back into poverty

Consequently, income available to people to spend on necessities has declined, pushing a significant number of people back into extreme poverty in Asia and the Pacific. ESCAP estimates that, compared to the expected, pre-shock levels, an additional 42 million people in the region have been pushed back into extreme poverty in 2022, based on the $2.15 per day threshold.

The estimates rise to 156 million people at the $3.65 line. This trend aggravates poverty concerns in the region at a time when the number of poor people in South Asia was already high and the decline in poverty in East Asia came to a halt in 2021.

High prices increasing gap between rich and poor

The disparity in the ability of different income groups to absorb persistence in prices at a higher level is also exacerbating inequality in Asia and the Pacific. For instance, wealthier individuals can mitigate the effects of inflation on their incomes through investments that have continued to offer reasonably high financial returns, such as real estate and stocks.

In contrast, poor and lower middle-income people, reliant primarily on wage income, have seen their purchasing power erode considerably. Between 2020 (the pre-pandemic year) and 2022 (the latest year for which data is available), the income share of the poorest 50 percent of population has dropped in 21 out of 38 countries in the region. Although data for 2023 is not yet available, income inequality is likely to have deepened further in many economies due to persistent high prices.

Policymakers can reduce suffering by containing price rises and increasing social protection

To tackle the challenge of moderating the impact of high prices on the lives of people in the region, a multifaceted policy approach is essential:

Contain persistent price rises: The primary response should be through timely and appropriately tight monetary policy stance. This helps in anchoring inflation expectations over a longer period, especially given that the forecast average inflation for 2024 remains relatively high compared with the pre-pandemic average.

Effective macroeconomic policy coordination: Effective policy coordination between central banks and fiscal authorities is crucial. Ensuring fiscal discipline and developing people-centric budgetary priorities, can help maintain overall economic stability including stable prices.

Protecting the vulnerable: In the short term, given limited fiscal space, governments need to implement targeted social protection measures to support the most vulnerable. Measures such as food coupons and unemployment benefits can help mitigate the immediate impacts of rising prices.

Increasing fiscal resources: Over the medium to longer term, governments need to increase fiscal space for necessary development spending through, among others, greater use of progressive income and wealth taxes and better efficiency in public spending.

Closing thoughts: Tackling the Cost-of-Living Crisis in Asia and the Pacific

Despite recent declines in inflation, high prices of essential goods and services continue to strain the livelihoods of the region’s poor and vulnerable, exacerbating poverty and inequality. By prioritizing inclusive growth and equitable development, governments can mitigate the impact of high prices, safeguarding the well-being of their populations and promoting long-term prosperity.

Copyright Business Recorder, 2024