Burden of rising inflation on low-income households

Inflation is having a significant impact on private households in Germany. Low-income households, in particular, are facing, in some cases, dramatic price increases for everyday consumer goods, which may threaten their very existence.

The packages of measures already adopted by the German government provide greater relief for lower-income households than for high-income households but are not sufficient to fully compensate for the burden of higher prices in the lowest income groups.

Against this background, Diakonie Deutschland e.V. proposes a crisis mechanism in the form of monthly payments of 100 euros per beneficiary:n for an initial period of 6 months. DIW Econ was commissioned by Diakonie Deutschland e.V. to study the effects of inflation and the effectiveness of its proposed crisis instrument.

The results show that high inflation rates primarily affect the lowest-income households. The proportional burden on the lowest-income households under current projected inflation trends is nearly five times that of the highest-income households. Almost 70 per cent of their net household income is spent by the 20 per cent of households with the lowest incomes on food, housing and transport, which are particularly burdened by inflation. At the same time, they lack financial leeway, such as reserves or a higher savings rate, to mitigate the consequences. Should inflation develop above current forecasts, the burden will also increase even more significantly.

In addition, the analysis reveals that implementing the Diakonie proposal could quickly and accurately alleviate the burden on lower-income deciles and vulnerable groups. In particular, households at the lower end of the income distribution could thus safeguard their consumption in times of high price increases. Even if inflation were to exceed current forecasts, these households would be effectively relieved by implementing the proposal. Nevertheless, it should be noted that some households living in hidden poverty could fall through the cracks of transfer payments. This applies in particular to pensioner households that do not exercise their entitlement to basic benefits and already benefit less from the relief measures adopted so far.

The calculations are based on data from the German Income and Consumption Survey (EVS) and the German Socio-Economic Panel (SOEP).

The inflationary burdens and effects of the government relief packages on the various income groups are the subject of the current DIW Wochenbericht by Maximilian Priem, Octavio Morales, Johanna Schulze Düding in collaboration with Prof. Dr. Alexander S. Kritikos:

DIW Weekly Report 28 / 2022

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