Poorer Households Hit Hardest by Inflation, but Fiscal Policy Has Mitigated Inequality, ECB Says

16 May 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – Lower-income households have suffered more from rising prices of late, but government support has alleviated some of the effects of the recent inflation surge, the European Central Bank said on Tuesday.

A pre-release from the third Economic Bulletin of 2023, due out on Friday, said that ‘in the current inflationary episode, the distributional consequences via the consumption channel have been particularly large because the terms-of-trade shock primarily affected necessities such as energy and food.’

The impact had been ‘particularly strong because low-income households are more exposed to increases in the prices of necessities’, the ECB said. However, ‘a resilient labour market and fiscal support measures have mitigated the adverse distributional effects of high inflation on households through the income channel.’

The gap in inflation experienced by households in the bottom and top 20% of the income distribution ‘peaked in late 2022, at the highest level since the mid-2000s’, according to the article.

The ECB said that ‘fiscal measures taken by governments have offset the inequality gap opened up by high consumer price inflation’ in the past few years. However, ‘fiscal measures did not exclusively target the most vulnerable social groups and […] benefits were felt by households across the income spectrum.’

According to the article, ‘some measures favoured higher earners over lower-income households, raising questions regarding both their efficiency and their economic side effects.’