Inflation, fiscal policy and inequality. The distributional impact of fiscal measures to compensate for consumer inflation

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 among lower-income households than among higher-income households. Fiscal measures compensated households for about a third of their welfare loss, though with significant differences across countries. At the same time, fiscal measures reduced the inequality gap between lower and higher-income households by around 60%. 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.