Distributional Impact of Soaring Prices in Europe: A Cross-National Decomposition of Inflation's Regressivity and Progressivity

This study examines the distributional impacts of price changes during the cost of living crisis from April 2021 to July 2022 in various European countries. Using data from the Household Budget Survey and a novel methodology adapted from taxation studies, we examine how inflation rates in various commodity groups and expenditure structures determine inflation progressivity or regressivity. Inflation predominantly has a regressive effect, burdening low-income households the most due to food, heating, and electricity inflation. In poorer countries, food inflation is the main driver of regressivity, while in richer countries, heating inflation is more significant. Exceptionally, heating inflation in Finland is progressive, as is overall inflation. Our findings indicate that low-income households' limited savings amplify their vulnerability to shocks, highlighting the complex interplay between inflation rates and expenditure structures in shaping income distribution and policy.