The moderation of prices since August benefits low incomes more

It has always been known that inflation is a much worse punishment for low incomes to the extent that they have less capacity to respond. But the current price hikes, fueled by the energy crisis sparked by the war in Ukraine, have hit vulnerable groups even harder. These have suffered greater price variations by consuming a greater proportion of the products that rose the most. According to calculations made by the economist Diego Barceló Larran based on INE statistics, the inflation they have experienced has become about two points higher for households that earn less than 500 euros a month and those that earn between 500 and 1,000. euro. If households are divided by income level into 10 groups, these would be the two groups that earn the least.

This was the case between March and September of last year. At that time, these groups have endured inflation of up to 12% and 13%. The reason was that energy represented a fairly important part of their consumption baskets. On the contrary, those families with incomes above 3,000 euros have registered increases at the same time of 9% and 10%. However, the good news is that with cheaper energy this difference has practically closed. Since August, the drop in electricity has provided some relief for low incomes.

International energy prices have fallen in a context of global economic slowdown, with lower Asian demand, with high gas reserves in European countries and a benign climate. In addition, the Iberian mechanism, which the Government implemented and which limits the price of gas in the wholesale electricity market, began to be applied on June 15 of last year and has also had a clear impact on the decrease in the regulated tariff. of the light. To the point that the price of electricity is falling by 30% in the interannual rate, according to the CPI statistics from the INE.

Energy and food weigh more in the purchases made by low incomes. While the heading of housing, electricity, water and gas represents between 27% and 22% of the basket of the lowest incomes, in the highest it represents around 12%. And food and non-alcoholic beverages cover more than 25% for low-income households compared to 19%-15% for high income households. Hence the differences in their CPIs.

These figures do not take into account the impact of the measures that the Government has designed specifically for these groups. For incomes below 500 euros, where profiles such as recipients of the minimum vital income or non-contributory benefits predominate, these rose by 15%. In addition, they could request the check for 200 euros and obtained a greater subsidy in the thermal and electricity social bonus, whose help is not reflected in this price evolution. If the average inflation last year was 9% in low incomes, the Government’s idea is that these measures, in principle, have offset a good part of the blow to this group.

Those with incomes of between 500 and 1,000 euros also had public aid: they had access to the reinforcement of the social bonus, they could ask for a 200-euro check and they were the group that benefited the most from the increases in the minimum wage.

Starting in September, inflation has taken a different form. Energy prices have fallen. But those of food, hospitality and leisure are rising strongly. Although food is very important for households with less means, restaurants and leisure monopolize a greater portion of the basket of high incomes, reaching 14% and 6%, respectively, well below the 6% and 3 % that they represent for families with less purchasing power. And that explains why at this time the evolution of inflation in the two groups is more even.

On the other hand, the transport chapter has also dropped a lot due to discounts on the use of the public network. This has additionally helped families with less economic possibilities. But this heading also includes gasoline, diesel and tourist flights, to which high incomes allocate more resources. In fact, in the wealthiest groups, the transport section takes around 15% of their basket compared to 8% for casualties. Hence, with the degree of disaggregation offered by these data, it is not possible to extract how much these subsidies for public transport have contributed to reducing the inflation of low incomes.

These numbers have been calculated taking the distribution of income expenses from the Family Budget Survey and applying inflation. To prepare a CPI for household income, it would actually be necessary to build a shopping basket for each income level, but since there are no data to prepare it, this distribution is the best way to approximate it.

The ECB alert

The ECB has already warned, taking very similar data from the euro zone, that low incomes were suffering up to two more points of inflation. This is the highest difference since 2006, explained the Eurobank. Between 2011 and 2012, in an environment with very low inflation, the gap only fluctuated between -0.25 and 0.25 percentage points. But also in this study it was warned that these groups save less, have less wealth with which to face the decline in purchasing power, have less possibilities of getting into debt and have a very limited margin to substitute products for cheaper ones such as Yes, the middle and upper classes can do it.

The richest households consume more expensive products, for example, they buy fewer white brands. In this way, high-income families have a way that poor families do not have to reduce their spending, by being able to replace expensive products with cheaper alternatives. In contrast, low-income households already buy cheaper and, consequently, find it more difficult to find items with lower prices. This substitutability cannot be measured in the CPI for a single year.

The Eurobank also pointed out that the poorest families face greater liquidity restrictions. “It is reflected in the increase in households that expect to pay their basic utility bills late,” he pointed out. And he added that the savings available to low incomes falls much more strongly for the same increase in energy spending, up to between five and six times more than in higher income groups.