Inflation & inequality

Bruegel, the European economic “think tank” recently published an article on the rise of  inequality due to higher inflation.  The main conclusion is that the surge in energy prices is severely aggravating the disproportional impact of inflation on the lowest income households. This is explained by the fact that lower-income workers spend a higher percentage of their total income on energy and also because the upper echelons usually have their savings invested in stocks or inflation-linked bonds which, to some extent, shield them from inflation crisis.

• The Euro area is experiencing its highest level of inflation (5%) since the creation of the common currency. Rising inflation has mostly been driven by the rise in energy prices.
  
  
• Inflation already tends to weigh more heavily on the lower-income households:

- Lower-income workers spend a higher percentage of their total income on energy, despite having similar consumption rates of energy.

- They are more likely to hold their savings in cash or in very low interest rates bank accounts, whereas the upper echelons usually have their savings invested in stocks or inflation-linked bonds, which shield them from inflation crisis.

- The bottom quartile of households in Belgium experienced a 6.9% inflation rate, in December of 2021, whereas the top quartile of Belgian earners experienced a 5,49% of inflation. A similar phenomenon was observed in Italy and France.

• Public strategies to shield households from rising energy prices work at a cost: Inflation inequality is not rising as much in France as it is in Italy or Belgium because of the introduction of certain measures (possibility for lower-income households to opt for regulated energy prices). The French government has already spent more than 20€ billion in measures to shield the public from rising energy prices. These kind of measures are viable only if the energy prices rise is temporary.
  
  
• The article suggest that the European Union need to start thinking on more efficient measures to mitigate the inevitable rise of energy price, bearing in mind that the prices of energy from fossil fuels will continue to be pushed up by the decarbonization process of the economy.