Is a Sustainable World an Inflationary World? Part 3 of 3: Financial Inclusion

Is a Sustainable World an Inflationary World? Part 3 of 3: Financial Inclusion

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03 May 22
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In brief

  • Financial inclusion refers to efforts to improve people’s access to financial services, as well as to ensure people are rewarded fairly for their work.
  • This piece examines two hypotheses. First, whether greater financial inclusion would lead to higher flows of credit across the economy, thus causing inflation.
  • Second, whether efforts to achieve pay equity would cause companies to spend more overall on labour costs, thus causing inflation.
  • We conclude financial inclusion is a hugely important sustainability goal. It is worth thinking through, however, the trade-offs involved in efforts to improve it.



In the third and final part of our series exploring the link between sustainability and inflation, we consider financial inclusion. This goal, broadly speaking, refers to efforts to improve people’s access to financial services, as well as to ensure that people are rewarded fairly for their work.

Financial inclusion is not just an economic good. It is important for efforts to stop climate change too. In the current environment carbon taxes on flights and meat consumption can be justified to reduce greenhouse gases -- but what is a mild inconvenience to a rich person is in effect a ban to a poor person. With greater financial inclusion, those costs are less onerous. Making people richer is also a good way to help them to think for the long term: when you are not worrying about where the next meal is coming from, you can think about what sort of world you want to leave your grandchildren.1

However, it is worth considering the potential inflationary consequences of a shift towards greater financial inclusion. In this piece we consider two hypotheses. The first relates to financial services.

Hypothesis 1

Greater financial inclusion will lead to higher flows of credit across the economy. This will lead to higher money supply, which will prove inflationary.

Across the world millions of people are excluded from the financial system. The latest data, from the World Bank, found that in 2017 about 30% of the world’s population aged 15 or over did not have an account at a financial institution (including via mobile money).2 Financial exclusion is far from just a developing country problem, though. In America today 13.8% of Black and 12.2% of Hispanic households are unbanked, relative to 2.5% of white households.3

Being excluded from access to finance, or having access to it on ruinous terms, has a number of negative consequences. Especially in poorer countries, it makes it harder for people to start new businesses or afford education. Particularly in rich countries, it makes home ownership practically impossible.

A range of public- and private-sector actors are thus interested in widening financial inclusion via various products and initiatives. Could these efforts, if adopted at scale, prove inflationary?

Arguments in favour of the hypothesis

As people are brought into the financial system, it seems reasonable to assume that aggregate credit creation will rise. The link between credit creation and overall inflation is far from clear, though there may be some relationship. Some analysts have drawn a connection between rapid bank credit growth in the US since the start of the pandemic and the current high rate of inflation.

Assume that the world continues to follow the post-lockdown playbook, and that credit creation has a positive relationship with overall inflation. It follows that greater financial inclusion will create structurally higher inflation.

Arguments against the hypothesis

Still, a link between financial inclusion and credit-driven inflation is hardly guaranteed. In particular, financial institutions might simply redirect lending away from certain groups and towards others, rather than increase overall lending volumes.

In other ways, too, improved financial inclusion could actually reduce inflation. If people are able to use their acquired finance to build more houses or access more education, then the “supply side” of the economy could expand relative to demand. More supply would thus help contain price growth.

The effectiveness of monetary policy may also increase in a financially included world. This is because a higher share of the population would care about the level of interest rates set by central banks.4 In such a situation, inflation is less likely to get out of control because increases in interest rates have stronger effects on borrowing and saving.

Finally, it is important to remember that financial inclusion is about access to saving as well as borrowing. Having savings is a vital part of financial resilience. But it also has important inflationary implications. A world of structurally higher saving rates might “cancel out” some of the inflationary impact of higher credit supply. Indeed a fundamental source of the structurally low inflation that the world witnessed in the run-up to the Covid-19 pandemic was linked to high global saving rates.5

Hypothesis 2

Efforts to achieve “pay equity” along gender, ethnic and racial lines will cause companies to spend more overall on labour costs. This will prove to be inflationary.

Even in the world’s richest countries, pay inequities persist. Millions of people remain underpaid for what they do, with large-scale evasion of minimum-wage payment.6 In addition there are large pay gaps. Women and ethnic minorities are often paid less for the same work.7 Few would argue that such pay gaps, where they exist, should remain. But it is worth thinking through what closing them means in practice.

Consider the question of gender pay gaps.8 This can be closed via one of two ways: raising the wages of the “underpaid” or cutting the wages of the “overpaid.” In practice, few people arguing for such gaps to be closed advocate the latter option. As such, closing pay gaps implicitly means advocating for a higher economy-wide aggregate wage bill.9

Of how much? Consider America’s gender pay gap, as reported by the Bureau of Labour Statistics, of 82 cents on the dollar.10 (This is an imperfect measure, but it helps illustrate the point.11) America’s annual aggregate wage bill is about $10.6 trillion.12 We calculate that $6.2 trillion is currently being paid to men and $4.5 trillion is being paid to women.13 Assume that we “level up” by raising women’s wages to eliminate the 82 cents gap. America’s overall wage bill must rise by $980 billion14 if we are to eliminate the wage gap, a rise of about 9%.

Arguments for the hypothesis

What will be the economic impact of that extra $980 billion? Any increase in aggregate wages can be inflationary. In the 1970s, for instance, negotiations between trade unions and employers for ever higher wages fed into firms’ costs, which they then passed onto consumers.15 There is some evidence that something similar is happening right now. Therefore, you might argue that “eliminating pay gaps will be inflationary.”16

Arguments against the hypothesis

But there are two other possibilities, as a matter of economic logic. The first is that wage rises come at the expense of companies’ profits (roughly speaking, GDP can be divided into wages and return on capital, including profits).17

The second is that economy-wide productivity could rise to compensate for additional wage costs. This mechanism is the fundamental reason why wages are a lot higher today than they were 100 years ago, but inflation is not through the roof. If people are producing more, firms are able to pay them more without raising their prices.

Some economists detect early signs of a pandemic-related surge in productivity, linked to the adoption of more automation and remote-working tools.18 You might also argue that other aspects of the sustainability transition -- from investment in new energy sources to improved healthcare -- might also help productivity. It might also be true that paying underpaid people more might directly increase their productivity, since their motivation might rise if they recognise that they are being paid more fairly. In this case, eliminating pay gaps need not be inflationary.


In the final part of Generation Investment Management’s series on the relationship between sustainability and inflation, we explored financial inclusion. This is a hugely important sustainability goal. It is worth thinking through, however, the trade-offs involved in efforts to improve it. If policymakers recognise these trade-offs, then we believe the sustainability transition can truly be a just one.

  8. Much of the analysis which follows could equally be applied to increasing the wages of “underpaid” people in general (such as through more effective enforcement of minimum wages).
  9. This is implicitly argued here, for instance:
  11. A pay gap can result in two ways: first, if folks are paid differently for the same work. The second is when there are fewer women or men doing the same job. In these circumstances, even if all are paid equally there will be a pay gap. The second factor is probably the main driver for America’s 82-cents-on-the-dollar pay gap. That doesn’t mean that such a pay gap is “good” or “OK,” but it is worth bearing in mind that the measure can mislead somewhat.
  13. The large difference between the total “wage bill” for men and women reflects both the fact that there are more male workers than female workers, and the fact that male workers are paid more than female workers.
  14. This is close to the estimate reported here, $956 billion
  16. A further thought remains to “marginal propensities to consume.” People on lower incomes generally consume a greater proportion of any additional income they receive. As such, directing more resources towards people on low incomes is likely to increase overall consumption. This, all else equal, pushes the economy in a more inflationary direction.
  17. Economists debate the extent to which the “labour share” of GDP has fallen in recent years. Most researchers agree, at least, on the notion that it declined in the US after the year 2000, but that the position is much murkier in other countries.

Important Information

The ‘Insights 11: Is a Sustainable World an Inflationary World? Part 3 of 3: Financial Inclusion' is a report prepared by Generation Investment Management LLP (“Generation”) for discussion purposes only. It reflects the views of Generation as at May 2022. It is not to be reproduced or copied or made available to others without the consent of Generation. The information presented herein is intended to reflect Generation’s present thoughts on sustainable investment and related topics and should not be construed as investment research, advice or the making of any recommendation in respect of any particular company. It is not marketing material or a financial promotion. Certain companies may be referenced as illustrative of a particular field of economic endeavour and will not have been subject to Generation’s investment process. References to any companies must not be construed as a recommendation to buy or sell securities of such companies. To the extent such companies are investments undertaken by Generation, they will form part of a broader portfolio of companies and are discussed solely to be illustrative of Generation’s broader investment thesis. There is no warranty investment in these companies have been profitable or will be profitable. While the data is from sources Generation believes to be reliable, Generation makes no representation as to the completeness or accuracy of the data. We shall not be responsible for amending, correcting, or updating any information or opinions contained herein, and we accept no liability for loss arising from the use of the material.