Does inflation put poorer households at a disadvantage?

Economists at Goethe University Frankfurt show that inflation in Europe is more burdensome for low income groups

Veröffentlicht am: Montag, 11. Juni 2018, 11:42 Uhr (032)

FRANKFURT. It is quite obvious that inflation may affect individuals differently. However, the extent to which the rate of inflation in the EU’s Member States disadvantages poorer individuals has now been shown by economists Eren Gürer and Professor Alfons Weichenrieder in a recent study.

Essential expenditure, for example for food, rent and electricity, make up a greater percentage of the budget of less well-off families than for more affluent ones. If the prices for such items rise more sharply than for luxury goods, this leads to low-income households having to put up with a higher rate of inflation in their individual shopping baskets. This means that the inflation rate can differ from the general rate of inflation depending on individual consumer habits. Is there a systematic distortion of the individual rate of inflation in the EU to the detriment of lower income brackets? This is a question that economists Eren Gürer and Professor Alfons Weichenrieder of Goethe University Frankfurt have now explored.

The analysis of data from 25 EU Member States from 2001 to 2015 shows that in most countries inflation tends to disadvantage poorer households: The annual inflation rate during this period for the poorest ten percent in a country was on average about 0.7 percent higher than for the richest ten percent. At an average inflation rate of 2.7 percent, this equates to a difference of slightly more than a quarter of the general rate of inflation.

Costs for electricity, rent, private means of transport and food, which have increased at an above-average rate, are above all responsible for this development. These items make up a far greater share in the shopping baskets of lower income groups. However, the effects are not equally pronounced in all countries: Whilst households in Italy and Portugal escaped this “discriminating inflation”, the EU’s Eastern European countries as well as the United Kingdom and Finland were particularly affected.

In Germany, the effect is comparatively moderate. Indeed, the gap here between nominal disposable incomes has by all means widened, as is known from other studies. The influence of inflation on income distribution - a topic neglected in previous studies – is, however, quite modest: It accounts for about one tenth of the increase in inequality already measured in the years under consideration.

This should not, however, blind us to the fact that in the representative German sample the shopping baskets of the lower ten percent became about 4.5 percent more expensive than the shopping baskets of the upper ten percent.

Publication: Eren Gürer and Alfons Weichenrieder, Pro-Rich Inflation in Europe: Implications for the Measurement of Inequality, Goethe University, SAFE Working Paper No. 209, May 2018. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3183723

Further information: Professor Alfons Weichenrieder, Chair of Economics and Public Finance, Theodor-W.-Adorno-Platz 4, Westend Campus, Tel.: +49(0)69-798-34788; email aw@em.uni-frankfurt.de