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The Central Bank of Ireland has 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.
