The unequal impact of inflation: How governments are responding
- 27 October 2022 (5 min read)
Key points:
- Inflation has reached multi-decade highs in most economies, driven by rising food and energy prices
- Different economies face different inflation rates – as do differing income groups and individuals
- Low-income households typically spend proportionally more on energy and food; they are disproportionately affected by inflation and less likely to have a savings cushion
- Governments have been quick to respond. Looking at the four largest Eurozone economies and the UK, measures began a year ago but have increased since February. They have accelerated further recently and we expect more to be announced over the coming months
- The latest measures have drifted from the least economically distortive approach. If this drift continues it risks conflicting with other longer-term goals of price and fiscal stability and emissions reductions
- The latest measures have not recognised the distributional impact of the energy shock. The longer-term distributional impact will be a complex mix of receding inflation, rising interest rates and recession
Inflation impacts low incomes hardest
Inflation has risen to multi-decade highs in most international economies, both developing and emerging. Most recently it has been driven by Russia’s invasion of Ukraine, which has significantly impacted food and energy prices. However, beyond the headline measures of inflation, the effect of rising food and energy prices typically has a greater impact on lower-income countries, households and individuals.
In this paper we examine the differential impact of inflation on different income groups and consider how governments have responded. Government policies have increasingly moved from an initial tendency of targeted and income-based support, to something which is now looking more general and price-based. This creates tension with other longer-term goals such as price and fiscal stability and greenhouse gas (GHG) emissions reductions.
With high energy prices likely to persist, we fully expect additional fiscal announcements over the coming months, particularly from Eurozone economies. However, we review the measures that have been announced to date and consider some of the implications for income distribution.
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