Rural, low-income, and older households experiencing larger cost of living increases from higher inflation

• Current high rates of inflation are driven by energy price rises and increased demand for goods and services meeting pandemic-related supply issues.
• Lower income, older, and rural households experiencing higher increases in cost of living; mainly because energy-related spending is a larger share of their expenditure.
• Targeted supports to offset higher energy bills can help the groups most impacted by recent price rises.

The Central Bank of Ireland has today (23 February 2022) published an Economic Letter, “Household Characteristics, Irish inflation, and the cost of living”, authored by Reamonn Lydon. The Letter presents data on how inflation levels differ across household types and outlines a number of findings of relevance to policymakers.

Current Central Bank inflation projections indicate that inflation will average 4.5% in 2022, with levels forecast to decline to 2.4% in 2023. This reflects an average for all households. However, different types of household will have different experiences of inflation. For example, households that drive more or spend a higher proportion of their income on home heating will be particularly affected by recent increases in energy prices, which previous Central Bank research has shown to be a key factor in the current high levels of aggregate inflation. The Letter therefore examines how inflation levels differ across households according to factors including location, income, and age.

The Letter finds that, relative to higher-income households, lower-income households spend a greater share of their income on energy and food, and less on goods and services. Headline inflation was 5.7% for the average household in December 2021, but is higher for rural (6.2%), lower-income (6.1%), owner-occupier and older households (both 6%). The Letter finds that increases in energy prices are the main driver of differences between these household types. Of the 6.2% inflation level experienced by rural households, half of this is attributable to energy costs (specifically, home energy costs and personal transport). This compares with a total 5.4% inflation rate for urban households, of which 2.1% is attributable to energy costs.

Goods and food inflation tends to be broadly similar across household types. The lower impact of energy price increases for some households is partially offset by higher increases in services prices for those same households. The lowest estimated inflation rate in December 2021 is for non- or low-driving households, at 4.7%.

In addition, the Letter looks at historical data to better understand the persistence of inflation differences. Data for the years 1998 to 2021 suggests that there are periods when inflation is higher for low-income households, but these have tended to be short-lived. There are also periods when inflation is relatively lower for low-income households; this is particularly the case in periods when energy prices were falling. Further, the Letter finds, higher-income households spend a greater proportion of income on non-energy industrial goods and services. During periods when prices in these areas are higher, the inflation differential between low- and high-income households is reduced.

The Letter concludes by setting out potential considerations for policymakers. It notes that, as monetary policy impacts aggregate demand, it is not necessarily the most appropriate tool for addressing supply-side drivers of inflation – such as energy price increases.

The Letter suggests that governments can look to address cost of living increases by linking supports to existing social transfers. Further, while energy price rises are expected to ease in 2022, energy price levels are likely to remain elevated in the medium term. Policies that help to increase energy efficiency for households, together with increased investment in non-fossil fuels, should therefore be a medium-term priority.

Notes to Editor

The CSO Consumer Price Index provides information on aggregate inflation. The expenditure weights used to calculate this are designed to represent the average Irish household, with benchmark weights taken from the five-yearly Household Budget Survey.

Today’s Economic Letter presents a methodology for estimating inflation rates by household characteristics. It uses the Household Budget Survey micro data to calculate expenditure weights for a given household type and, in turn, estimate an inflation rate for those households. The estimates should be viewed as being broadly indicative of differences across household types, and do not capture every individual’s cost of living experience.

Economic Letter – An Overview of Recent Inflation Developments (Byrne, Zekaite) (Vol. 2021, No. 7)

Economic Letters – full series