The Bank of Portugal (BdP) warns that inflation has a more serious impact on lower-income households than on higher-income households, as for the former it is mainly due to the price of essential goods.
In its October economic bulletin, released this Thursday, the BdP outlines the uneven impact that rising inflation can have on households, breaking down household spending by income quintile and age group.
The analysis of the banking supervisor shows that the differentiated impact is related to the different evolution of the prices of the different goods and services and their weight in the consumption basket of each family.
The fact that the high inflation projected for lower-income households is mainly due to the price development of essential goods, with inelastic demand, has more serious consequences than the same inflation for higher-income households, which have a greater contribution from goods. and services whose consumption is more easily replaced or postponed”explains the BdP.
The institution led by Mário Centeno also points out that in a negative purchasing power shock, “lower-income families have a more limited opportunity to smooth out consumption, as they have a lower savings rate and less wealth”.
Despite the fact that inflation estimates for the different groups of households are close to each other until August, the BdP notes that the dynamics of inflation are very different for each group.
In the case of lower-income families, the estimated inflation is largely due to the rise in the prices of essential goods and services, with the contribution of food goods and housing costs, including energy, explaining 73% of the change in the cost of living of these families. families in August 2022.
On the other hand, for higher-income families, the contribution of the change in the prices of essential goods is 40% to the estimated inflation, “while the contribution of the increase in the prices of restaurants and hotels is almost 25%”.
“While the weight of gasoline and diesel spending does not differ greatly between income levels, middle-income quintile households are penalized slightly more by the rise in the price of these goods. The cost of cars, however, has a greater weight in the spending of higher-income families.”points.
The contribution of essential goods to inflation in August is estimated at 46% in young families and 64% in older families. On the other hand, the contribution of fuel and other transport costs is lower for the over-65s.
“The Inflation Estimates Based on Family Characteristics Presented” […] are important to assess the distributive effects of rising prices and can be useful to inform government policies aimed at reducing the rise in the cost of living,” the regulator said.
Source: DN
