Foundations
High inflation
All inflation rates above 15% are typically considered high. But inflation can sometimes reach 50%, 100% or even 1000%!
What are we talking about?
As a rule of thumb, for the purpose of our work, we can consider that a year-on-year inflation rate is:
- low when in the low digits (e.g. <6%)
- medium when in the high digits or low teens (e.g. 6-15%)
- high when in the high teens or higher (e.g. >15%)
As soon as inflation starts being high, we need to consider adapting some of our ways of working.
Why do we care?
High inflation typically disproportionately affects some segments of the population, in particular the poor. High levels of inflation will at first decrease purchasing power of the entire population. But over time, most of the traditional middle class will find mechanisms to cope with inflation (and their salaries will also eventually adjust). High inflation affects more and more durably the poor, and in particular people living on fixed income like pensioners. This is especially true when basic items of the consumption basket are also primary drivers of overall inflation, insofar as food consumption forms a larger proportion of the expenses incurred by poorer households.
In turn, in periods of high inflation, there will also be higher risks related to the use of increasingly damaging negative coping strategies, especially in terms of food security and livelihoods (e.g. adults restricting consumption in favor of children, engaging in dangerous unsafe work, etc).
In our work, high inflation mostly affects our contracts and everywhere where we use a set price: transfer value, payments (because not the same at beginning and end of period).
Local inflation in our areas of operations could also be a result from our interventions.
As humanitarians, we should be monitoring the price of the MEB or SMEB in our areas of operations on a monthly basis, not only because it can help us monitor locally high inflation but because it also gives us at the same time information that we care about about the impact of our interventions or the appropriate transfer size for our programs.
How do we monitor it?
To monitor the inflation rate, we look at the change in the price year-on-year (YoY) for a representative basket of goods. The national inflation rate is calculated on the basis of such a basket of goods, called the CPI, and is often available as secondary data from various institutions. We can use it as a point of comparison for the inflation that we measure in our areas of operation using the MEB or the SMEB.
When monitoring inflation, we may want to also look at specific prices (such as food prices, housing prices, etc) as well as compare inflation in local currency to inflation for the same items with prices measured in a hard currency. This will provide us with additional insights about the source of inflation and whom it will affect most. See our Fundamentals about inflation for more information about what to measure and to look for.
When inflation is high locally in our areas of operations, we need to check whether the effect is the same everywhere in the area and at the country level. We need to understand how 'typical' our areas of operations are compared to the rest of the country (as well as to monitor potential distortionary effects of our interventions and ensure that we do no harm).