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Inflation, fiscal policy and inequality

Author

Listed:
  • Basso, Henrique S.
  • Flevotomou, Maria
  • Freier, Maximilian
  • Pidkuyko, Myroslav
  • Amores, Antonio F.
  • Bischl, Simeon
  • De Agostini, Paola
  • De Poli, Silvia
  • Dicarlo, Emanuele
  • Maier, Sofia
  • García-Miralles, Esteban
  • Ricci, Mattia
  • Riscado, Sara

Abstract

This paper analyses the distributional impact of high consumer inflation in the euro area and government measures to compensate households in 2022. The study uses the tax-benefit microsimulation model for the European Union (EUROMOD) with microdata as the input – EU statistics on income and living conditions (EU-SILC) and household budget surveys (HBS) – to quantify the distributional impact of inflation, income support measures and measures aimed at containing prices. The analysis confirms that purchasing power and welfare were more severely affected by the 2022 inflation surge in lower-income households than in higher-income households. Fiscal measures compensated households for about a third of their welfare loss, though with significant differences between countries. At the same time, fiscal measures closed around 60% of the inequality gap between lower and higher-income households. Most fiscal measures were not particularly well targeted at low-income households, resulting in a higher than necessary fiscal burden to cushion the distributional impact of the inflationary shock. JEL Classification: D12, D31, D60, E31, H20, I30

Suggested Citation

  • Basso, Henrique S. & Flevotomou, Maria & Freier, Maximilian & Pidkuyko, Myroslav & Amores, Antonio F. & Bischl, Simeon & De Agostini, Paola & De Poli, Silvia & Dicarlo, Emanuele & Maier, Sofia & Garcí, 2023. "Inflation, fiscal policy and inequality," Occasional Paper Series 330, European Central Bank.
    • Handle: RePEc:ecb:ecbops:2023330
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    Cited by:

    1. Sologon, Denisa Maria & Doorley, Karina & O'Donoghue, Cathal, 2024. "Gender Disparities in Inflation during the Cost-of-Living Crisis in Europe: A Novel Decomposition," IZA Discussion Papers 16860, Institute of Labor Economics (IZA).
    2. Cathal ODonoghue & Beenish Amjad & Jules Linden & Nora Lustig & Denisa Sologon & Yang Wang, 2023. "The Distributional Impact of Inflation in Pakistan: A Case Study of a New Price Focused Microsimulation Framework, PRICES," Papers 2310.00231, arXiv.org, revised Mar 2024.
    3. O'Donoghue, Cathal & Can, Zeynep Gizem & Montes-Viñas, Ana & Sologon, Denisa Maria, 2025. "Macro-Economic Change and Household Financial Strain in Europe 2006-2022," IZA Discussion Papers 17739, Institute of Labor Economics (IZA).
    4. Filippo Pallotti & Gonzalo Paz-Pardo & Jiri Slacalek & Oreste Tristani & Giovanni L. Violante, 2024. "Who Bears the Costs of Inflation? Euro Area Households and the 2021–2023 Shock," NBER Chapters, in: Inflation in the COVID Era and Beyond, National Bureau of Economic Research, Inc.
    5. repec:ptu:bdpart:e202412 is not listed on IDEAS
    6. Sara Riscado & Sharmin Sazedj & Lara Wemans, 2024. "The personal income tax in Portugal: from the sovereign debt crisis to the inflationary shock," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.

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    More about this item

    Keywords

    distributional effect; EUROMOD; fiscal policy; inflation; welfare effect;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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