Who bears the costs of inflation? Euro area households and the 2021–2023 shock

Filippo Pallotti, Gonzalo Paz-Pardo, Jiri Slacalek, Oreste Tristani, Giovanni L. Violante

Research output: Contribution to journalArticlepeer-review

Abstract

We measure the heterogeneous first-order welfare effects of the recent inflation surge across households in the euro area. A simple framework illustrating the numerous transmission channels of surprise inflation to household welfare guides our empirical exercise. By combining micro data and aggregate time series, we conclude that: (i) country-level average welfare costs – expressed as a share of triennial income – were sizable and heterogeneous: around 3% in France and Spain, 7% in Germany, and 9% in Italy; (ii) this inflation episode resembles an age-dependent tax, with the retirees losing up to 14%, and roughly half of the 25–44 year-old winning; (iii) losses were quite uniform across consumption quantiles because rigid rents served as a hedge for the poor; (iv) nominal net positions were the key driver of heterogeneity across-households; (v) the rise in energy prices generated vast variation in individual-level inflation rates, but unconventional fiscal policies helped shield households. The counterpart of this household-sector loss is a significant gain for the government.

Original languageEnglish (US)
Article number103671
JournalJournal of Monetary Economics
Volume148
DOIs
StatePublished - Nov 2024

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Fiscal support
  • Household heterogeneity
  • Income
  • Inflation
  • Net nominal positions
  • Redistribution
  • Welfare

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