How does inflation affect remittances? Do immigrants send less money home?

Each year millions of workers send cash, in the form of remmittances, to family and friends in other countries. These funds represent a significant economic force in low-income countries. For some countries, like Honduras, remittances make up over a quarter of their GDP.

Over the last two years, the US economy has experienced widespread inflation across markets for goods and services, and these economic troubles have had a noticeable impact on the sending of remittances. With supply chains breaking down as a consequence of the covid-19 pandemic, the Russian invasion of Ukraine, which upended energy markets, and the willingness of the private sector to put profits over capital investments to boost production, inflationary pressure has racked the global economy.

Inflation creates economic hardship in low-income countries

Inflation has not only cut down the amount of money many workers could send in reminisces, but since inflation is a global issue, it has also cut into the purchasing power of recipients to use their remittances to purchase essential goods. As explained by the KNOMAD, a research organization focused on global migration, inflation in low and middle-income countries (LMIC) surpassed levels seen in high-income areas in 2022, driven by the “depreciation of local currencies, as well as a buildup in financial pressures (widening fiscal and external deficits).” Researchers noted that these conditions cut into the purchasing power of remittances while also increasing the demand for these monies overall.

How has inflation impacted remittances sent to Latin America and the Caribbean?

Given these conditions, it should be noted that in 2022, the total amount of remittances sent grew for all areas of the world. In real terms, however, these additional funds may not have gone as far in high-inflation markets that cut into purchasing power.

Let’s take Mexico as an example.

In 2022, the average remittance amount sent to Mexico was $391. In 2019, that figure was $326, representing an increase of nineteen percent. Over that same period, prices rose in Mexico by an average of 16.9 percent, meaning that in real terms, the average remittance only grew in value by three percent.

Broadening our focus, a similar trend was seen across Latin America and the Caribbean, with a nearly ten percent increase in the total quantity of remittances tracked throughout 2022. However, throughout the region, average price increases surpassed this level, indicating that nominal increases in the amount sent were not always associated with real increases in purchasing power.

The unemployment rate for foreign-born workers fell quickly in the United States

In the United States, the unemployment rate of Hispanic and Latino workers has fallen steadily since 2020. In January 2023, the unemployment rate for this group was 4.5 percent, 1.1 percent higher than the national average but down a percentage from a year prior.

When looking specifically at foreign-born workers, KNOMAD pointed out that in the US the “employment of migrants recovered faster than the employment of native workers.” As these workers reentered the labor force, they benefited from higher nominal wages and, in turn, were able to send higher remittances.

Nevertheless, the tight labor market in the US did not lead to increases in remittances across the region. Some Caribbean countries like the Dominican Republic and Jamaica saw a decline in remitted funds by six and two percent, respectively. Additionally, other factors, aside from US labor market conditions, help to explain the variation in amounts sent to different countries. For instance, in Nicaragua, where the political situation has led thousands to flee to the US for safety and economic opportunity, remittances are projected to have increased by forty-five percent last year.

Overall, while inflation plays a role in the amount of remitted income sent by workers to loved ones, it is only one factor impacting this complex flow of funds.