Inflation affects all consumers, but not with the same intensity. Deciphering the reason for the different price increase behaviors in households involves going beyond the income level and invites us to analyze the weight of assets or debts as well as to analyze which products our shopping basket is composed of. The same heterogeneity is found in the autonomous communities, where the income level of households has a lot to say.
An analysis by the Bank of Spain starts from the premise that no house is the same as another and, although it recognizes that it lacks a more complete vision (it is only framed in 2021, when the situation arrived by surprise) and the fact does not measure the impact of inflation on economic activity, employment or dividends nor does it take into account the fiscal measures approved by the government to minimize the blow to portfolios, it offers a sufficient approach to, in this context, identify which group has been most affected by inflation that happened three years ago unexpectedly.
Income, wealth and consumption as a whole
The proposal put forward by the organization measures how inflation has affected households’ savings capacity through the analysis of the impact on the revenue channels (if incomes increase less than the general price level), of wealth (assets and liabilities) and consumption relative (not all baskets are the same) to determine what the difference in impact of price increases on pockets depends on.
The conclusion is that it is age and not income level that is the most relevant aspect to explain the differential impact of inflation on Spanish households. This is explained, according to Clodomiro Ferreira, macro-financial and monetary policy analyst, by the fact that “as we age, we go from being debtors to savers, so the impact of inflation through the wealth channel, which is quantitatively very important, goes from being positive to negative. But how?
The weight of each channel in household accounts allows the shock of inflation to be absorbed more or less. Yeah wages does not increase or increases less than inflation, purchasing power will be more or less reduced, but the state of assets (financial, real estate, etc.) and debts (mortgages, for example). In this case, the analysis recalls that inflation “enriches” debtors (the real value of the debt decreases in the event of high inflation because the indebted product becomes more expensive) and generally “impoverishes” those who have assets: savers and creditors, because the rise in prices reduces the real value of debts while tending to decrease the real value of assets (less purchasing power).
He relative consumption This is the last ingredient to detect why some are more affected than others by inflation. Whether the price increase has more or less influence will depend on the products most frequent in the household basket (if beef increases more than pork and the household buys more beef, it will be more affected by prices unless you modulate your consumption behavior).
After analyzing how the three channels filter inflation, it is possible to represent the impact of inflation on the savings of each of them and reflect the total effect resulting from the addition of the impact on each of them. Thus, from the work directed by Ferreira – in its broadest version of the title The heterogeneous impact of inflation on household balance sheets– It is concluded that the wealth channel and the income channel were quantitatively more important than the relative consumption channel and it is emphasized that the magnitude of the channels and the total impact of inflation, although they vary according to the level of household income, are also, especially, according to the age of the people.
The “advantage” of being a debtor in times of inflation
In general, middle-aged people (36-45 years old) were not very affected by the inflation that occurred in 2021 (in net terms) because they are generally debtors (many have a mortgage) and they compensated for the losses in the income channel that affected all households with the gains they obtained through the wealth channel. “In fact, for young and middle-aged households with low incomes, the net impact was positive,” says Ferreira.
The main victims of rising inflation that year were people aged 65 and over (especially those in this age group with lower income levels), because they tend to be savers, with a very large share of their savings concentrated in deposits and checking accounts whose real value declined with inflation.
The columns represent by age groups the average individual in each quartile, from lowest to highest income (q1 includes people with income in the bottom 25% of said distribution, q2 captures customers between 25% and 50%, q3 captures customers between 50% and 75%, and q4 includes customers with income above 75%).
The impact also varies depending on the CCAA
The heterogeneity of the impact of inflation is also reproduced between the autonomous communities. The Bank of Spain has also intervened here and in its report “Regional heterogeneity in the recent evolution of inflation in Spain” highlights that Castile-La Mancha and Galicia These are the regions where cumulative inflation has been the highest since June 2019.
The study in this case is broader and analyses the impact of price increases in the regions between June 2019 and June of this year, a period in which cumulative inflation for the entire Spanish economy was 18.9%. During this period, Castilla-La Mancha (21.2%) and Galicia (20.4%) recorded the highest price increases, while Madrid (17.1%) and Catalonia (18.1%) recorded the highest moderate increases, according to calculations by the Bank of Spain.
This heterogeneity results from the differences that exist between communities in terms of the composition of household consumption basketsAlthough the food, beverages and tobacco group experienced higher cumulative inflation than the energy group, in Extremadura and the Canary Islands, for example, the increase in food prices was almost three points higher than the national average.
In other words, as is the case with households, inflation depends on the way in which the autonomous communities consume and this, in turn, is influenced by the level of income per household of each autonomous community. In the Community of Madrid, where the level of household income is higher, the weight of services in the consumption basket is higher, while in Extremadura the component with the greatest weight is food.
In this case, the study takes into account the measures approved by governments to reduce the impact of inflation. Specifically, it analyzes public transport assistance and highlights that their impact also varies depending on the LACC analyzed due to the different intensity of the discounts applied. However, the impact has been greater in communities where the railway hubs are more important, such as the Community of Madrid or Catalonia.
