Distributional Inflation Effect on Household Balance Sheet

The recent surge in inflation hit Lithuania with a 20 percent increase in 2022, affecting many households. This paper examines the heterogeneous wealth effects of the recent inflation surge in Lithuania. Specifically, I consider different channels – wealth, income, and consumption – but also the monetary and fiscal policy responses to the inflationary shock. I quantify these channels by using data from the Household Finance and Consumption Survey (HFCS). The results show that the consumption channel affected all households similarly, while the income channel disproportionately affected low-income and elderly households. Moreover, the impact of inflation was closely related to households’ net nominal wealth position. The wealth channel significantly eroded the wealth of older households but had a positive impact on younger households, especially those with mortgages. Fiscal policy adjustments partially mitigated the impact of inflation on the most vulnerable households. Meanwhile, the monetary policy response helped offset losses for households with substantial nominal asset holdings. In addition, all these channels influenced changes in wealth inequality in the country. While aggregate wealth inequality remained broadly unchanged, distributional effects showed a decrease in inequality measures for renters and a slight increase for homeowners and mortgage holders.