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In its June 2022 Economic Outlook, INSEE estimated that, because of the lower weight of heating and food in their budget, young people fare better than older households. Similarly, residents of large cities with public transport are better off than rural households, while households in the lowest 10% are more strongly affected by inflation.  These differences in consumption patterns tend to offset each other over time: on average over 2015-2021, inflation differences are negligible. If energy prices were to fall, older, rural and low-income households would be the first to benefit. In the short term, however, rising prices constrain the consumption of those who have no accumulated savings. For them, maintaining expenditure in value terms leads to a drop in the volume consumed.

In its latest publication on the subject, INSEE estimates that the rise in energy prices between the second quarter of 2021 and the second quarter of 2022 contributed 3.1 percentage points to the observed inflation (5.3%). The tenth of the population most affected is not the poorest one (3.3 percentage points) but the third one: households between the poorest 20% and the poorest 30% (3.5 percentage points). At the other end of the distribution, the contribution of energy to inflation would be only 2.7 points for the wealthiest 10% of households. In the absence of price controls (freezing of the regulated retail gas price, small increase in the regulated retail electricity price, fuel discount), the impact of the energy shock would have been much more disparate, peaking at 7% for the third tenth (Figure 1).

 

Figure 1. Effects of higher energy prices on inflation, by tenths of living standards

Q2 2021 to Q2 2022, in %

 

Interpretation: between the 2nd quarter of 2021 and the 2nd quarter of 2022, the rise in energy prices led to an increase in the cost of the consumption basket of 6.8% before price controls for the first tenth of households (the poorest 10%); an effect reduced to 3.5% due to price controls (gas, electricity and fuel).

Source: INSEE (2022).

The International Monetary Fund has calculated the impact of the rise in energy prices on the cost of living for the lowest 20% of households and for the highest 20%, in various European countries. The impact is very different from one country to another, both in terms of the average (for all households) and in terms of dispersion (inter-quintile range). France, along with Hungary and Finland, is the country where households are least affected on average and where, moreover, the incidence is closest between the first and last quintile. In contrast, the effect of higher energy prices is particularly marked in the UK and even more so in Estonia, two countries where the effect is also very different across income quintiles. Using a different method, the OFCE obtains qualitatively similar results.

Breaking the piggy banks

At the aggregate level, French households over-saved during the Covid crisis: according to the Banque de France, their financial savings exceeded their pre-crisis trend by more than €150bn in aggregate between the first quarter of 2020 and the first quarter of 2022, in cumulative terms. Assuming an average inflation of 5.5% in 2022 (Consensus Forecasts of August 2022 and INSEE forecast of June 2022, the French Stability Programme 2022 is assuming 5%), the additional cost of consumption this year would be around €70bn for households, i.e. less than half of the oversaving accumulated during the Covid crisis. Indeed, final household consumption (excluding individualisable public consumption) was €1,265bn in 2021.

While all deciles saved money during the Covid crisis, wealthy households did so more than others. According to the Conseil d’analyse économique (CAE), the median household would have fully consumed its ‘Covid over-savings’ by the end of 2021, its savings having then returned to their pre-crisis trend. But the lowest 10% would have drawn on their Covid savings to cope with the rise in prices: in June 2022, their savings stock would have been around 5% below the level that would have prevailed if the pre-pandemic trend had continued. However, the CAE does not detect any increase in financial insecurity as measured by the share of households with a bank account in deficit at the end of the month.

Changes in income

The final impact of price increases on the standard of living of households depends on the evolution of their income. In particular, we must take into account the indexation of certain incomes and targeted transfers to some categories of households. Table 1 below summarises the measures taken for the year 2022 in the case of France, following the Law of 16 August 2022 on emergency measures to protect purchasing power. Excluding permanent revaluations, but including price controls and the fuel discount, Bruegel calculates that France is among the countries that have provided the most support for household purchasing power since the start of the energy crisis.

Table 1. Household income support measures in France for the year 2022

Schemes

Measures

Social transfers

 

Inflation allowance

 

€100 paid at the end of 2021/beginning of 2022 to 39 million individuals with cumulated gross income from 1 January to 31 October 2021 not exceeding 26 000€.

Exceptional back-to-school bonus

€100 per household receiving minimum social benefits, housing benefits and/or in-work benefit, + €50 per dependent child in the household. Payment in September.

Value-sharing bonus (formerly exceptional purchasing power bonus)

Maximum annual amount of this tax-free bonus is doubled: up to €6,000 tax-free per employee if the company has a profit-sharing agreement. Exemption from income tax and social security contributions for employees earning less than 3 Smic (minimum wage) until the end of 2023.

Permanent revaluations

 

Basic retirement and disability pensions

+1.1% in January, +4% in July

Family allowances, minimum social benefits

+1.4% in April, +4% in July

In-work benefit

+4% in July

Personalized housing assistance (APL)

+3.5% in July

Revaluation of the minimum wage

+0.9% on 1/1, +2.65% on 1/5, +2.01% on 1/8, i.e. +8% de from Sep. 21 à to Sep. 22.

Revaluation of the civil service point

+3.5% on July 1st

Lower contributions

 

Social security contributions for the self-employed

Cut in contributions (about €550 for net income close to the minimum wage)

Comparing Figure 1 and Table 1, it is clear that low-income households and older households are well targeted by income support measures: this targeting compensates for the greater impact of higher energy and food prices on these categories of households.

For low-income workers, the minimum wage will have risen by 8% between 1 September 2021 and 1 September 2022, for an annual increase in consumer prices of around 6%: even before taking into account the various bonuses and transfers mentioned in Table 1, their purchasing power will have increased. Wage increases are traditionally more gradual when moving away from the Smic, even if indexation of the Smic accelerates the rise in other wages (Gautier, Roux and Suarez Castillo, 2019). According to the Banque de France, sectoral wages negotiated in the last quarter of 2021 and the first quarter of 2022 were on the rise by 3% on average. The Dares estimates the increase in the basic hourly wage of manual and clerical workers between June 2021 and June 2022 at +3.5%. In the DG Treasury’s forecasting model Opale, the rise in prices in year N leads to wage increases distributed between year N and year N+1.

Household incomes are also supported by job creation. Despite the energy crisis, 170,000 jobs have already been created in the private sector by 2022 Q2. Combined with wage increases, indexation and support measures, this employment dynamic means that purchasing power should remain stable in 2022. 

The cost of war

Central banks are used to saying that inflation increases inequality because the incomes of modest households are less indexed to prices than those of wealthy households. This observation must be qualified in France, where minimum social benefits, pensions and the minimum wage are indexed to prices. In 2017, microsimulations carried out by INSEE concluded that a one-point increase in inflation had a small impact (-0.1%) on the standard of living of the first tenth of the standard of living (the 10% most modest) two years after the shock, the time profile depending on the indexation schedules. The study found a maximum impact (-0.6%) for the top 10% of households. However, the simulated price increase was a uniform increase, with all consumption items increasing in the same proportions. Furthermore, income from assets was assumed not to be indexed. However, some asset incomes – rents, regulated savings acounts in particular – are indexed, while others, such as listed shares, may see their value increase or decrease depending on the origin of inflation and the reaction of the central bank. On average, however, inflation is unfavourable to savers because nominal returns increase less than prices. On the contrary, it is favourable to indebted households insofar as, in France in particular, the majority of mortgages carry a fixed rate.

In France, household purchasing power increased by 5.8% cumulatively over the period 2017-2019. It remained stable in 2020 (+0.4%) and increased by 2.2% in 2021. The massive government support during the Covid crisis and now during the energy crisis is costly for public finances. If the increase in the cost of imported energy is permanent, then households and companies will have to gradually distribute the cost among themselves, with a negative impact on purchasing power. This is the real cost of the war for Europeans.

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>> Version française : Injuste inflation

>> All posts by Agnès Bénassy-Quéré, chief economist – French Treasury

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