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High Inflation a Threat for Cities With Large Consumer Spending On Necessities

5/6/2022
Fransua Vytautas Razvadauskas Profile Picture
Fransua Vytautas Razvadauskas Bio
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Rising inflation has placed the global economy in limbo. With 57% of the global population projected to live in cities in 2022, the rising cost of living is anticipated to put urban consumers in a precarious position, especially in low-income cities where a high share of consumer budgets is devoted to essentials such as food and non-alcoholic beverages and housing. Food costs have soared as supply chain disruptions caused by the war in Ukraine and the COVID-19 pandemic have led to unprecedented rises in commodity prices. Yet economic empowerment remains a key tool for mitigating high necessity spending as shown across several fast-growing emerging and developing cities.

Top 10 Cities with the Highest Share of Necessity Spending in 2021 and Inflation Forecasts for 2022

imagevl1p8.pngSource: Euromonitor International from national statistics/UN/Eurostat/OECD
Note: Necessity spending share includes expenditure on food and non-alcoholic beverages, housing and clothing and footwear as a share of total household expenditure. Inflation in 2022 is forecast

High inflation raises food security challenges in low-income cities

Rising inflation is stretching consumer budgets. In 2022, many cities are forecast to record double-digit annual inflation including Tehran and Lagos – both megacities housing over 10 million people and boasting some of the highest rates of expenditure on necessities such as food and transport.

Food remains one of the largest household expenditure groups in less affluent cities. In several sub-Saharan African cities, food and non-alcoholic beverages constituted over 40% of a household’s budget in 2021. This contrasts with cities in advanced economies where food outlays cover a less significant share that ranges from around 8-15%. With record rises in food costs, consumers in less affluent cities face stiff challenges in 2022. According to the Food and Agriculture Organization (FAO), its Food Price Index averaged 159.3 points (base year 2014-2016 = 100) in March 2022. This was up by 17.9 percentage points from the previous month and was at the highest point since its inception in 1990. This includes record rises in the price of staple goods such as wheat and coarse grains as a result of export disruptions caused by the war in Ukraine.

Rising food prices were already a problem prior to 2022 with cities facing supply chain disruptions due to the COVID-19 pandemic. For example, in Shanghai, the Consumer Price Index (CPI) for food and non-alcoholic beverages rose by 1.7% Y-o-Y in 2021 compared with the average of 1.0% across all budget categories. A similar pattern has been seen in other cities. In 2021, across over 1,000 cities, more than 80% recorded higher increases in the consumer prices of food and non-alcoholic beverages compared with the average rise across all budget categories. In Tehran, where US sanctions have resulted in the rial depreciating against the dollar, inflation has led to an immense rise in the price of staple goods.  

image7hz9.pngSource: Euromonitor International from national statistics/UN/Eurostat/OECD

Protecting the poorest with economic measures is key, but financial empowerment remains the best tool to mitigate inflation vulnerability

During periods of rising inflation, safeguarding the poorest is paramount. This can involve reducing consumption taxes such as VAT, providing subsidies to cushion price rises of certain necessities such as food, housing and transport and offering direct cash transfers to the poorest households. For example, in British Columbia, Canada, a maximum rent increase has been capped at 1.5% in 2022 by the local government to protect renters from rising housing costs.

However, financial empowerment remains a more powerful tool for mitigating inflation vulnerability. Proportionally low household expenditure on essentials provides urban consumers with a larger buffer to accommodate price rises, which helps reduce the risk of households cutting back on necessities such as food, housing and clothing and footwear. A number of cities in the emerging and developing world which have benefited from economic growth over the last two decades saw a shift in the spending habits of their residents. For example, in Shanghai, the share of consumer expenditure on food and non-alcoholic beverages fell from 23% in 2005 to 17% in 2021. The city experienced strong economic growth that raised consumer incomes and helped produce a new middle class that expended more on recreational activities and less on necessities as a share of total spending.

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Source: Euromonitor International from national statistics/UN Eurostat/OECD
Note: High refers to household disposable incomes over USD100,000 in 2021; Medium refers to household disposable incomes between USD20,000 – USD100,000; Low refers to household disposable income below USD20,000. Necessity spending share includes expenditure on food and non-alcoholic beverages, housing and clothing and footwear as a share of total household expenditure.

For further insight, read Cities Household Necessities Spending Index. 

 

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