“Same prices. Different endings.” 

Inflation increases lead to significant loss of income, which can subsequently cause reduction in household consumption with detrimental effects on well-being. Academic evidence suggests that the income inequality, caused by inflation changes, aggrevated during recessions. This is explained by the fact that the vulnerable households spend a larger portion of income on basic goods, which experience significantly higher price increases during recessions, as opposed to the luxury goods.

Let's give an example using two households (the wealthier and the poorer) of different income groups.

Scene 1: SUPERMARKET – MORNING ☀️

The Smiths scan the shelves. Jennifer holds a bottle of olive oil. “$12.50… again?” she sighs. Michael taps his phone. “It was $10.80 last month. Prices up 16% in four weeks. We’ll buy it next week.”. Jennifer nods, hiding her worry. Savings can absorb this.

Across town, in a cramped apartment, the Williams stare at the same shelf. Maria whispers “Milk is $4.20 now. Last month it was $3.50.”. Her husband, Carlos, mutters, “The kids need it.”. She immidiately responses “They’ll drink water tonight.”. Carlos looks at the empty wallet. No savings to cover $0.70 extra per liter, multiplied by three liters a day. Every cent counts.

Scene 2: APARTMENTS – EVENING 🌝

Rent notices slide under doors.

Smiths: Michael reads aloud, “$2,200. Up from $2,050 last year. That’s a 7% increase. Still manageable.”. Jennifer smiles. “We expected this.”.

Williams: Carlos counts coins. “$950 rent… up from $850 last year. That’s $100 more we don’t have.” Maria whispers, “We already used the last $50 from groceries to cover part of it.” Carlos nods, staring at the numbers like they’re enemies. No buffer. No room to absorb shocks.

WEEKS PASS

Energy bill rises $25/month for the Smiths — inconvenient.

Energy bill rises $25/month for the Williams — survival question.

Bread, gas, transport, healthcare — each increase minor in percentage, massive in lived impact.

Scene 3: KITCHEN TABLE – NIGHT🌚

Smiths: “Electricity $120 now, $100 last month,” Michael notes. “Savings can cover it.” Jennifer shrugs. “We’re fine.”

Williams: “Electricity $120, like you said… $100 last month,” Carlos mutters. Maria looks at the kids and says “We’ll go without the heater tonight.”. Carlos buries his face in his hands. One misstep away from food insecurity.

Scene 4: LIVING ROOM – ONE MONTH LATER

Smiths check the headlines. “Inflation down to 5% this month,” Jennifer says. “Finally,” Michael smiles. Savings still intact.

Williams count coins quietly. “Food $80 this week,” Maria whispers. “Rent $950… we paid late,” Carlos says. “We’re behind. We’re poor now,” Maria murmurs.

Key messages⚠️

Inflation is not one number. It is $12.50 olive oil for some, $4.20 milk for others. It is absorbed by savings for some, pushed households below the poverty line for others. Inflation redistributes silently. With buffers, it’s an inconvenience. Without buffers, it is a fall.

Research study 📊

In our recent study (jointly with Prof. Stavros Degiannakis and Assoc. Prof. George Filis), we assess the households’ inflation inequality in Greece not only across different income groups but also across other households’ social and economics characteristics, such as, occupational status and household composition. The picture that emerges from our results is that the stronger inflation differences with significant policy implications is evident at the household income categories with the poorer household experiencing significant higher inflation.

Figure clearly demonstrates that there are periods when the household-level inflation converges to the aggregate inflation, but more importantly, there are certain years when there are material cross-households inflation differentials. In particular, during 2010-2013 we observe the first of the two periods when these differentials are realized. Interestingly enough, during 2010-2011 the inflation bias is towards the wealthier households, where they experienced an inflation rate at about 6%, as opposed to the poorer households that had an inflation rate of about 4%. There is a clear regime change in 2011 when the households with income level below 750 euros per month suffered a materially higher inflation rate compared to those households that belong to the highest income bracket (over 3500 euros per month). The declining trend of all household-level inflation rates is explained by the catastrophic consequences of the Greek debt crisis of that period.

The second notable period is the one running from 2021 until the end of our sample period. This period is characterised by the significant energy-related inflation in Europe due to the Russian invasion in Ukraine. We observe that disaggregated inflation rates of that period diverge by up to 5%, with the lower income households facing an inflation rate of more than 14%.

The two periods analysed above suggest that the aggregate inflation is far from being representative of the population. In the latter case, a policy decision based on the aggregate inflation level will aggravate the negative effects of the household-level inflation rate, which will lead to an indirect redistribution of income and will exacerbate income inequality. Hence, such economic conditions call for disaggregated inflation forecasts based on which policy-makers could formulate more targeted policies that would actually alleviate the burden of such inflation bias towards the poor.