Working Paper: CEPR ID: DP18611
Authors: Filippo Pallotti; Gonzalo Pazpardo; Jirka Slacalek; Oreste Tristani; Giovanni Violante
Abstract: We measure the heterogeneous welfare effects of the recent inflation surge across households in the Euro Area. A simple framework illustrating the numerous channels of the transmission mechanism 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 2021–22 income– were larger than a typical recession, and heterogeneous, e.g., 3% in France and 8% in Italy; (ii) this inflation episode resembles an age-dependent tax, with the elderly losing up to 20%, 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 are 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 were critical in shielding the most vulnerable households.
Keywords: inflation; redistribution; consumption; housing
JEL Codes: D12; D14; D31; E21; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inflation (E31) | Household welfare loss (D19) |
| Inflation (E31) | Elderly household income loss (J26) |
| Inflation (E31) | Younger household gains (D15) |
| Rigid rents (R21) | Welfare loss uniformity across consumption quantiles (D69) |
| Nominal net positions (G19) | Heterogeneity in welfare loss (D69) |
| Rising energy prices (Q41) | Varying individual inflation rates (E31) |
| Unconventional fiscal policies (E62) | Shielding vulnerable households from inflation effects (H31) |