Inflation Is Currently Hitting the Rich Harder than the Poor in Germany

Inflation in Germany is currently higher for richer households than for poorer households, according to calculations by the ifo Institute. These show that the price of a basket of goods for a household with a monthly net income of over EUR 5,000 was 4.8 percent higher in October than a year earlier. For households earning less than EUR 1,300, the rate was significantly lower at 4.0 percent. The average was 4.5 percent. “This is down to the composition of the basket of goods,” says Timo Wollmershäuser, Head of Forecasts at ifo. “High prices for gasoline and for car purchases account for a much larger share of wealthier households’ monthly expenses.”

The October rate for households with a net income of EUR 1,300–1,700 was 4.4 percent, while for the EUR 1,700–5,000 income brackets it was 4.6 percent. Compared to 2019, the poorest households currently have to spend EUR 19 more and the richest households EUR 111 more per month on their respective basket of goods, because prices increased by more than they did on average in the years before the coronavirus crisis. This calculation already takes into account that inflation rates differ among households. If the price increase had been the same for all households, the additional expenditure would have been EUR 6 per month higher for the poorest households and EUR 6 per month lower for the richest households.

The economic consequences of high inflation rates are particularly pronounced when inflation hits private households unexpectedly: their purchasing power is reduced because their incomes do not keep pace with the cost of living. In the process, poorer households have to limit their consumption more. Unlike richer households, they have no means of meeting the additional expenses, since they already spend all of their monthly income anyway, they have few financial assets, and debt options are limited. However, since actual inflation is currently much lower for poorer households than for richer households, these distributional effects of the rise in inflation are mitigated by a comparatively smaller increase in poorer income groups’ cost of living.