The poorest families are the most penalized by inflation, since they spend a greater part on goods that cannot be replaced and on which prices rise the most, such as food, energy and, in the future, housing.
The inflation rate looks at the price variation of a ‘basket’ of goods and services over time (for example, in May this year versus May 2021). A loaf that cost 19 cents last year and now costs 20 cents has a 5% variance. However, each group of products in the ‘basket’ is weighted according to its importance in the average household budget (that is, the prices of products such as electricity, on which households spend more, have more weight than those of the products in which they spend less, such as newspapers).
However, each family has its own consumption habits -some use the car more and others use public transport more, some eat more meat and others more vegetables- and different budgets and capacities to manage them.
Inflation also indicates the variation in prices if each consumer maintained the same pattern of consumption, which does not happen, being able to consume less, buy more own brands, among other variables.
For Susana Peralta, university professor at Nova SBE, “the poorer the families, the greater the weight of spending on income and the more they spend most of their family budget on food, energy, housing.” The richest, on the other hand, since they spend proportionally less on this type of expense (they spend more in absolute terms, but as their income increases they spend proportionally less) have room for adjustment because “they can cut less essential things, such as leisure, so as not to have to touch the essentials”.
In general, families with higher incomes spend less of their income on basic necessities and more on transportation, restaurants, hotels, leisure, and culture, which are easier to replace.
In addition, richer households save more, so they may also choose to reduce savings to maintain consumption levels, which is not the case for households that have a large part of their income absorbed by essential goods that they cannot save. Susana Peralta also recalls that, in Portugal, there are many families that even have negative savings (they spend more than they earn).
In April, a group of economists, including Susana Peralta, carried out a study in which they estimated how much the State would need to transfer to the poorest families between 133 million euros and 457 million euros, depending on the increase in inflation, to offset the impact of rising prices on those most in need.
Thus, by analyzing different inflation scenarios (2%, 4% and 6% and a mixed inflation scenario, depending on the product categories) the researchers estimate how much it would be necessary for the State to transfer to the poorest families (those who become of people from the poorest 20% of Portugal, based on income equivalent per adult) to cope with rising food, housing and transport prices.
“It would be necessary to transfer between 158 euros and 545 euros a year for each household, to cover the increase in prices in these three spending categories,” according to researchers Bruno P. Carvalho, Mariana Esteves and Susana Peralta.
António Afonso, a professor at the ISEG, explains that there is a basic set of goods that all families spend on -food, clothing, transport, energy, housing- and while a family that earns 1,000 euros a month spends the entirety on that and any price changes have a great impact, while in a family that earns 10,000 euros the same increases do not have the same impact.
“That family of 10,000 euros, instead of paying 600 euros for food, can pay 700 euros and there is no problem, it is marginal,” he said, recalling that between these two families there are many income intervals (for example, 2,000 or 3,000 euros). monthly income per family).
Since the beginning of the year the average inflation rate is 5%. Only energy inflation is much higher, around 20%. “Add that to interest rates that will gradually start to go up, and a lot of home mortgages are variable rate, it’s going to be a problem for lower-income families,” he said.
For the XTB brokerage analyst Henrique Tomé, inflation (whose rate reached 8% in May, the highest in the last 29 years) “is reducing the purchasing power of families, especially those who already had less purchasing power ”, and the loss of purchasing power will be further aggravated by the ECB’s decision to raise interest rates in July with the aim of containing inflation. An increase that will have an immediate impact on the amount paid in housing credit contracts. Added to this, he added, is the fact that wages do not keep up with rising prices.
“In this way, the gap between the richest and poorest social classes is expected to widen further and will have negative economic consequences for the Portuguese economy,” said Henrique Tomé.
A study recently published by the European Commission, entitled ‘Who does inflation hurt the most?’ (authored by Guillem Vidal and Davide Villani), indicates that the impact of rising prices (the latest inflation data analyzed is from March) is not evenly distributed and that the poorest families suffer more than the richest families.
Analyzing household consumption in 17 Member States, the consumption ‘basket’ of the poorest households is concentrated in essential goods (food, energy, family income), while the richest households spend more on leisure and transport, more easily replaceable.
According to the study, inflation, caused mainly by energy and food, especially affects the most vulnerable in eight countries: Belgium, Greece, Italy, Ireland, Latvia, Lithuania, the Netherlands and Spain. In these countries, the inflation suffered by the poorest families is between 2.6 percentage points higher (in the case of Ireland) and 5.3 percentage points higher (in the case of Italy) than that suffered by the richest families.
In Portugal, the study authors found no significant differences in the rate of inflation between the five groups of families analyzed, which, they explained to Lusa, is due to transportation. The richest families spend more on transportation and in this area there is also an inflationary rise, which blurs the difference.
In Finland, Hungary and Sweden, they report, wealthier families have higher levels of inflation.
For the authors, the effects of inflation on the most vulnerable highlight the “urgency of implementing social justice policies, aimed at the poorest, for example, financed with more taxes on the extraordinary profits of companies that contribute to inflation. In the long term, they advocate structural reforms that avoid a disproportionate cost for the poorest, such as the review of wage indexation mechanisms that help contain the loss of purchasing power, since they consider that increases in wages would help avoid shocks of demand due to the loss of purchasing power, which affects economic growth.
The National Institute of Statistics (INE) confirmed this Wednesday that the interannual variation of the Consumer Price Index (CPI) was 8.0% in May, compared to 7.2% in April, the maximum since February 1993. variation of the index referring only to energy products increased to 27.3% and the index referring to unprocessed food products varied 11.6%. Also on Wednesday, the Bank of Portugal forecast that inflation will hover around 5.9% this year.
Source: Observadora
