The inflation-poverty nexus: evidence from a cross-country approach

We study the effect of inflation on poverty in a large panel dataset of 160 countries observed from 1970 to 2024. We estimate two-way fixed effects models that control for per capita GDP and calculate the sensitivity of internationally harmonized poverty measures (using different poverty lines) to the inflation rate. Our results point to a statistically significant positive impact of inflation on poverty, but only when relatively high poverty lines are used. Heterogeneity analysis reveals that the size of this effect is positively associated to country income level. Furthermore, unconditional quantile regressions suggest that the effect is larger in the second quartile of the international poverty rate distribution, implying the link is particularly strong for upper-middle income countries (notably, Latin American economies). Our findings replicate in a subsample of disinflation episodes. These results contribute to the relevant ongoing debate on the consequences of inflation and disinflation, suggesting a rationale for the political popularity boost usually associated to successful disinflations.