A cost-of-living squeeze? Distributional implications of rising inflation
Inflation has quickly and significantly increased in most OECD countries since the
end of 2021 and further accelerated after Russia’s war of aggression against Ukraine,
mostly driven by surging energy and food prices. Certain categories of households
are particularly vulnerable, as large parts of their consumption expenditures are
devoted to energy and food. Drawing on national micro-based household budget surveys
and on CPI data, this paper provides a quantification of the impact of rising prices
on households’ welfare. Declines in household purchasing power between August 2021
and August 2022 are estimated to range from 3% in Japan to 18% in the Czech Republic.
This decline is driven by energy prices in most countries, especially Denmark, Italy,
and the United Kingdom, while energy prices play a lesser role in countries where
inflation is more broad-based like the Czech Republic and the United States. In all
considered countries, inflation weighs relatively more on low than high-income households.
Rural households are hit particularly hard, most often more than low-incomes ones,
and this is driven by energy price inflation. To cushion vulnerable households from
rising inflation, especially from energy prices, these findings call for a careful
targeting of income and price support measures, notwithstanding their administrative
and logistical complexity, taking into account their effects on economic activity,
inflation, and, last but not least, environmental goals.
Published on December 22, 2022
In series:OECD Economics Department Working Papersview more titles