What do we know about inflation and poverty in Latin America

The recent pandemic event generated interest in the dormant research on the variation of prices and their determinants, as we faced the highest level of inflation in recent decades. From this general inflation level, food price is one of the leading indicators of these broader economic pressures, serving as both a measure of financial health and a direct mechanism of economic vulnerability. For low-income households, food expenditures constitute a significantly larger proportion of total consumption, price changes translate into immediate rebalance of their basic basket of purchasing goods, and variations of economic stress. The effect of inflation on those households is deemed as "obvious," yet the relationship between food inflation and inequality is not a simple one. This project investigates two essential aspects of food inflation inequality: the first oriented to the determinants of the price changes in food prices, and the second, the differential impact of food inflation across income levels. The relationship between inflation and inequality is fundamentally asymmetric. If we disaggregate the analysis, the literature shows how inflationary pressures disproportionately affect the economic buffers of the poorest populations. Considering this, we will focus on Latin American countries because of their particular characteristics. The proportion of the low-income population is high, and the level of income and wealth inequality is high compared to other developing countries and developed countries. They are also characterized by economic exposure to foreign shocks, a relatively high proportion of agricultural workers, and historical patterns of socioeconomic stratification, such that they offer a particular lens through which to examine their mechanisms of economic resilience and vulnerability. For determinants, we will explore the inflation structure by characterizing foreign and domestic components. Global inflation effects help analyze cost transmission and determine systemic shock exposure. As shown by Stock and Watson (2007, 2020) and Forbes (2019), we can model inflation in trend and cycle components, where we expect that they capture the long- and short-term effects of the determinants. A stylized fact of food prices is that they exhibit high volatility as commodity markets face continuous shocks. Latin America, as a natural commodity producer, experiences high volatility in both prices and income. If we look at the figure titled "LATAM and Advanced Economies Food Inflation," we can see that the general food inflation in Latin America is, on average, higher than in most of the advanced economies. Although this spread has reduced over time, the volatility in these markets is considerably higher, as we can see from the high and low values. Once characterized, the inflation dynamics will allow us to relate the channels that transmit shocks to inequality itself. The second part will focus on the relationship between food inflation and its effects on both lower- and high-income populations. The food prices increase the income of workers and agricultural firms, but increase the costs of the most basic baskets of goods with lower elasticity of substitution, making their impact disproportionately high for the lower-income population. If we analyze the interplay of the income and cost channels of food price inflation, we can determine their inequality and overall welfare impact on the economy. Taking into account the determinants is vital to understand the causes of inequality, as even though inflation is considered a source of growing inequality, it is a shock absorber and distributes its effect on the population, but it is important to understand the source of the shock itself.