Inflation Dynamics and Household Consumption in Emerging Economies: A Multi-Country Empirical Analysis

The inflation in emerging economies is at an unprecedented level that impacts the welfare of the household and its consumption behavior. The study under review investigates how inflationary changes will affect 47,850 households in 12 developing economies (2018,2024). We examine the effect of inflation, volatility and expectations on total and category-specific consumption using multiple regression where the country and time fixed effects are used. Findings indicate that the household consumption is highly sensitive to inflation (β = -12.847, p = < 0.001) and that the effect is 2.8 times higher among the lower-income households, indicating the regressive effect of inflation. There is a shift to necessities, with the growth of consumption of food shares increasing at 0.234 percentage points per 1% increase in inflation, and discretionary spending declining by 0.345 points. The role of uncertainty is that inflation volatility has an independent negative impact on consumption (8.456, p < 0.001). In the mediation analysis, 24.4 percent of the effect is found to work through the inflation expectations, and this emphasis is given on credible communication by central bank. The research is valuable in that it depicts the idea of multi-channel transmission, heterogeneous income impact, and anticipatory changes in creating economies. The policy implications are also high: since household consumption is a major component of GDP (60 70 percent), inflation-related contractions may increase the volatility of the economy. An elasticity of consumption recorded of -1.5 is an indication that consistent inflation can considerably suppress aggregate demand and long run growth patterns in such markets. This paper adds value to the literature in three aspects. It pulls the inflation rates, volatility and expectations into one empirical model using big household data on 12 emerging market economies. It measures the mediating value of inflation expectations and by doing so determines that 24.4% of all the impacts of inflation are mediated by the channel of expectations. It also shows that there are substantial differences in response to inflation that are based upon income, and provide policy-relevant implications on inflation-targeting in emerging economies.