The distributional impact of high inflation and the related policy response

Boris Chafwehe, Mattia Ricci, Matteo Salto and Daniel Stoehlker

Quarterly Report on the Euro Area (QREA), 2024, vol. 23, issue 4, 21-35

Abstract: The recent surge in inflation has had a profound impact on household finances across the euro area, but its effects have been far from uniform across population groups. Monetary and fiscal policy responses to this shock have also had uneven effects on households. This chapter studies the impact of the recent unexpected surge in inflation on euro area households, considering both its direct effects and the policy responses. Detailed micro-level data on household consumption, income and wealth have made it possible to capture the three main direct channels through which inflation affects households: the devaluation of nominal assets and liabilities, the devaluation of nominal incomes, and the relative consumption channel. The results of the simulation suggest that the devaluation of nominal wealth has disproportionately affected pension-age households, while the impact on working-age households has been more regressive due to differences in nominal asset balances and income growth. Fiscal policy measures have not always been well targeted but have cushioned some of the losses for households. There have nevertheless been significant losses, especially for low-income and pension-age households. Interest rate changes, on the other hand, have increased the burden of servicing loans for indebted households, while mitigating the losses of older households which tend to have considerable interestbearing assets. The analysis highlights the importance of considering the uneven effects of inflation when designing policy responses to mitigate its impact on household finances.

Keywords: Inflation Heterogeneity; Monetary and Fiscal Policy; Euro Area; Unhedged Rate Exposure (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:euf:qreuro:0234-02

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