Inflation affects consumers in Europe in very different ways. Annual rates of price increases in Europe have recently hit poorer households in particular, who spend their money on goods and services that become comparatively more expensive over time. These differences can be addressed politically, but that need not be a task for the ECB, according to a Policy Letter from the Leibniz Institute for Financial Research SAFE.
“Inflation is a matter of opinion in two respects,” says Alfons Weichenrieder, author of the policy letter at SAFE and professor of finance at Goethe University in Frankfurt. “On the one hand, inflation is temporarily different for different income groups, and on the other hand, different metrics lend themselves to inflation measurement.”
Poorer households face higher price increases
According to the observations of Weichenrieder and his co-author Eren Gürer, the period from 2001 to 2015 shows that the annual rate of price increases tends to be lower for higher-income households than for poorer households. Accordingly, for richer households, the bulk of total spending tends to fall on telephones, cars, clothing, leisure, recreation, and culture, and thus on areas where the inflation rate is low on average across 25 EU countries. In contrast, poorer households spend the bulk of their total expenditures on rents, energy supply, and food, which have increased in price at an above-average rate over 14 years.
“There is no such thing as one inflation rate for consumer spending,” Weichenrieder explains, “the baskets of goods are too different for that.” For a central bank's monetary policy, it might therefore make sense not to read inflation from a specific basket, but to include several price indices. Nevertheless, redistribution policy is not a task of the ECB: “The ECB does not have the right tool to influence the sectoral structure of inflation and to ensure redistribution; fiscal policy is better suited for that,” says Weichenrieder.
In contrast to various countries outside the euro area, owner-occupied housing is not included in the harmonized consumer price index as a consumption variable. This is another reason why the price development of nominal gross domestic product (GDP deflator) would be a very interesting alternative inflation measure, according to the authors. Not only does the GDP deflator include construction services in the calculation, compared with the consumer price index it also better reflects how the real labor costs of companies change with rigid nominal wages. In this context, nominally rigid wages are often the focus of warnings against too low inflation or even deflation.