Consumption, Inequality and Poverty in the Household: Monetary Expansion and Food Expenditure Dynamics in Iran
This paper analyzes Iran's 1982–2024 economic landscape to demonstrate that while monetary expansion significantly influences household food expenditure, inequality, and poverty through distinct channels like nominal income growth and exchange-rate depreciation rather than a single mechanical liquidity effect, the resulting trends show that welfare improvements have occurred alongside a complex decoupling of food expenditure shares from broader inequality metrics.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
In the study of how money moves through a society, economists have long watched the relationship between the amount of cash in circulation and the prices people pay for what they need to live. When a government prints more money than the economy produces, the value of that money tends to drop, and the cost of goods rises. This is a fundamental rule of economics, but the real-world impact is rarely a simple, straight line. The effect depends heavily on what people are buying, how quickly prices change, and whether the money is reaching households as wages or getting stuck elsewhere. For families living on tight budgets, the most immediate and painful sign of this shift is the cost of food. Unlike a car or a television, which a family can delay buying, food is a daily necessity that cannot be postponed. When the price of food spikes, it forces families to spend a much larger slice of their total income just to eat, often leaving nothing for other needs. This pressure on the household budget is a direct measure of how well a society is doing for its poorest members, offering a clearer picture of poverty and inequality than income statistics alone.
A recent study by Mohsen Behzadi Soufiani at the University of Tehran examines this exact dynamic in Iran over a period of more than forty years, from 1982 to 2024. The country offers a stark and compelling setting for this investigation because it has experienced a massive and sustained increase in the amount of money in circulation, driven by long-standing government spending deficits. During this time, the total money supply grew by more than fifteen thousand times in nominal terms, while the country also faced repeated sharp drops in the value of its currency due to international sanctions and economic shocks. The researcher wanted to understand how this flood of money and the resulting currency devaluation actually affected what Iranian families spent on food, and whether these changes made the gap between the rich and the poor wider or narrower. By looking at the specific numbers for food spending, income, and currency values, the study traces a path from the central bank's decisions all the way to the dinner table of an average household.
The analysis reveals that the relationship between the growth of money and the cost of food is real and stable over the long term, but it does not work in the way one might expect. The study finds that when the money supply grows, it does not immediately and mechanically force families to spend more on food in a direct, one-to-one fashion. Instead, the extra money first fuels growth in household incomes and drives down the value of the currency. It is these two factors—higher nominal wages and a weaker currency—that then push up the price of food. The research shows that for every one percent increase in household income, food spending rises by about 0.57 percent, and for every one percent drop in the currency's value, food spending rises by about 0.17 percent. The direct effect of the money supply itself is smaller and less statistically certain once income and currency values are taken into account. This suggests that the money printed by the government reaches families primarily by increasing their paychecks and by making imported goods more expensive, rather than by simply adding cash to their pockets that they immediately spend on groceries.
The speed at which households adjust to these changes is also a key finding. The study indicates that if food spending drifts away from its normal long-term balance with income and currency values, it corrects itself quickly. Roughly two-thirds of any deviation from this balance is fixed within a single year. This rapid adjustment makes sense because food is a necessity; families cannot simply stop eating or wait years to buy what they need. When prices rise, they must spend more immediately, and their spending quickly settles back into a new pattern that reflects their actual purchasing power. This fast response highlights the resilience of household budgets in the face of inflation, as well as the immediate pressure that price shocks place on families who have no room to cut back.
When the study looks at how these changes affect inequality, the picture becomes more complex. One might assume that when food prices rise sharply, the gap between the rich and the poor would widen significantly, with the wealthy able to absorb the cost while the poor suffer. However, the data tells a different story. The research shows that the gap in food spending between the richest and poorest households actually narrowed over the decades, roughly halving between 1995 and the early 2010s. This happened because the nominal spending of poorer households grew slightly faster than that of the richer households. Yet, this narrowing gap in spending does not necessarily mean that the poor were better off. Because food is a basic need, poorer families had to spend a much larger share of their total income just to maintain their food consumption, while richer families could absorb the cost without changing their overall lifestyle. The study finds that the official measure of inequality, which looks at income distribution, does not fully capture this specific stress on the poor. In fact, during the most severe currency crises, the official inequality numbers sometimes suggested things were getting better, while the reality for families was that they were being pushed toward the edge of poverty.
This disconnect is most visible when looking at the "Engel coefficient," a simple measure of what percentage of a household's income is spent on food. In normal times, a lower percentage indicates a comfortable life, while a higher percentage signals financial strain. The study tracks this percentage over forty years and finds that it swung dramatically. During the severe currency crises of the late 1980s and the late 2010s, the average Iranian household was forced to spend more than half of its income on food, a level that economists classify as absolute poverty. In contrast, by 2024, despite the massive growth in the money supply, this figure had fallen to under 20 percent, suggesting a return to a comfortable standard of living for the average urban family. This improvement, however, masks the fact that the poorest families still carry a much heavier burden relative to their income than the average suggests. The study concludes that monitoring only the overall gap between rich and poor is not enough to understand the true cost of inflation. To truly gauge the welfare of a nation, one must look at the specific pressure on food budgets, the speed of price adjustments, and the distinct ways that monetary expansion affects income, currency value, and the daily struggle to put food on the table.
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