Abstract
Highlights:
1. Inequality in Inflation's Impact: Evaluates how inflation during the living cost crisis differentially affects various income groups in Europe.
2. Economic Strain on Low-Income Households: Focuses on the higher financial burden faced by poorer households due to increased prices of essentials.
3. Comparative Analysis Across Europe: Offers insights into the varying degrees of inflation impact among European countries with different economic standings.
4. Welfare in Inflation's Impact: Evaluates how inflation during the living cost crisis affects welfare, which takes into account behavioural responses to price changes.
This paper disentangles the distributional and welfare impact of price changes since the start of the cost of living crisis for a subset of European countries with different welfare regimes and price changes. It decomposes the impact of inflation and measures welfare changes using the compensating variation and equivalent incomes in a cross-national comparative perspective. The impact of inflation depends on good-specific price increases and budget shares. Budget shares for necessities (e.g. food, domestic fuel, electricity) are higher in poorer countries and for poorer people. Higher price growth in these necessities has resulted in higher inflation in poorer countries. Counter to the media narrative, the distributional impact is less substantial than expected. A significant cross-country variability exists, however, in inflation levels, composition and relative rates across the distribution. Similar levels of inflation regressivity result from different interplays between the level and disproportionality of inflation along the income distribution. We quantify the compensating variation of inflation with a relatively small behavioural component due to the preponderance of necessities among the goods with high price changes. An important factor concerning the potential impact on households is the savings rate. Households with already low savings are disproportionally feeling the impact on their expenditure.
1. Inequality in Inflation's Impact: Evaluates how inflation during the living cost crisis differentially affects various income groups in Europe.
2. Economic Strain on Low-Income Households: Focuses on the higher financial burden faced by poorer households due to increased prices of essentials.
3. Comparative Analysis Across Europe: Offers insights into the varying degrees of inflation impact among European countries with different economic standings.
4. Welfare in Inflation's Impact: Evaluates how inflation during the living cost crisis affects welfare, which takes into account behavioural responses to price changes.
This paper disentangles the distributional and welfare impact of price changes since the start of the cost of living crisis for a subset of European countries with different welfare regimes and price changes. It decomposes the impact of inflation and measures welfare changes using the compensating variation and equivalent incomes in a cross-national comparative perspective. The impact of inflation depends on good-specific price increases and budget shares. Budget shares for necessities (e.g. food, domestic fuel, electricity) are higher in poorer countries and for poorer people. Higher price growth in these necessities has resulted in higher inflation in poorer countries. Counter to the media narrative, the distributional impact is less substantial than expected. A significant cross-country variability exists, however, in inflation levels, composition and relative rates across the distribution. Similar levels of inflation regressivity result from different interplays between the level and disproportionality of inflation along the income distribution. We quantify the compensating variation of inflation with a relatively small behavioural component due to the preponderance of necessities among the goods with high price changes. An important factor concerning the potential impact on households is the savings rate. Households with already low savings are disproportionally feeling the impact on their expenditure.
| Original language | English |
|---|---|
| Place of Publication | Bonn |
| Publisher | IZA – Institute of Labor Economics |
| Number of pages | 53 |
| Publication status | Published - Nov 2022 |
Publication series
| Name | IZA Discussion Paper Series |
|---|---|
| Publisher | IZA – Institute of Labor Economics |
| No. | 15738 |
Keywords
- Income Inequality and Inflation
- Distributional Effects of Inflation
- Soaring Prices' Welfare Effect
- Income Groups and Price Hikes
- Economic Crisis Impact Analysis
- Low-Income Budget Strains
- Cross-Country Inflation Comparison
- Cost of Living Crisis in Europe
- Inflation and Poverty Connection