Inflation, Fiscal Policy, and Inequality: The Impact of the Post‐Pandemic Price Surge and Fiscal Measures on European Households

Abstract

AbstractFollowing the inflation surge in the aftermath of the pandemic crisis, Euro Area governments adopted a large array of fiscal measures to cushion its impact on households. The inflationary shock and related fiscal measures affected households differently depending on their country, their consumption patterns, and their position in the income distribution. This paper uncovers the aggregate and distributional impact of this inflationary shock, as well as the impact of the government measures aimed at supporting households and containing prices. The analysis is carried out for 2022 and includes Germany, France, Italy, Spain, Portugal, and Greece. Our work confirms that the purchasing power and welfare of low‐income households was more severely affected than that of high‐income households. Fiscal measures contributed significantly to closing this gap, though with country differences. However, most fiscal measures were not particularly targeted at low‐income households, implying a low cost‐effectiveness in protecting the poorest in some countries.