The impact of the recent rise in inflation on low-income households

The effects of the recent increase in euro area HICP inflation significantly differ for low and high-income households.

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ECBECB
URL: 
https://www.ecb.europa.eu//pub/economic-bulletin/focus/2022/html/ecb.ebbox202207_04~a89ec1a6fe.en.htmlhttps://www.ecb.europa.eu//pub/economic-bulletin/focus/2022/html/ecb.ebbox202207_04~a89ec1a6fe.en.html
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Friday, November 11, 2022
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Tags: 
HICP, Tourism, Heat, Consumption, Restaurant, Motor vehicle, ECB, Travel, Environment, Incidence, COICOP, Classification, HFCS, Water, Housing, Policy, Government, Electricity, HSBC Finance, HBS, CES, Household Finance and Consumption Survey (Ireland), Food, Recreation, Income, Real estate, Bookkeeping, Recycling, Auction
Summary
Key Points: 
  • The effects of the recent increase in euro area HICP inflation significantly differ for low and high-income households.
  • This box explores how recent high inflation levels are affecting low-income and high-income households differently in two main areas: their effective inflation rate due to different spending patterns, and their ability to buffer cost of living increases through savings or borrowing.
  • Consumption baskets vary across income groups, with low-income households spending proportionally more on essentials.
  • The income-specific consumption baskets reported in the Eurostat Household Budget Survey (HBS) allow effective inflation rates to be calculated by income quintile.
  • Decomposing the inflation gap, electricity, gas and other fuels and, increasingly, food prices are the main drivers of the higher inflation faced by lower-income households.
  • Inflation difference between the lowest and highest income quintile households in the euro area
    (percentages)

    Sources: Eurostat Household Budget Survey, ISTAT and ECB calculations.

  • Notes: Chart B shows the difference between the effective inflation rates for low-income households (first quintile) and high-income households (fifth quintile).
  • They tend to consume a larger share of their income, save less and face liquidity constraints more often than high-income households.
  • The higher incidence of liquidity constraints experienced by poorer households is reflected in the rise in households expecting to make late payments on their utility bills.
  • Low-income households perceived the recent government measures aimed at easing the impact of higher energy prices as less adequate than high-income households did.
  • This may suggest that there is scope for more effectively targeting government measures towards low-income households.
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