Inflation, fiscal policy and inequality

Following the inflation surge in the aftermath of the pandemic crisis, governments adopted a large array of fiscal measures to cushion its impact on households and firms. In the euro area, discretionary fiscal measures are estimated to amount to around 2% of GDP, in both 2022 and 2023. In the analysis of the impact of inflation and related fiscal measures the distributional dimension is particularly relevant, since the sudden and strong increase in prices affected families differently depending on their position in the income distribution. Furthermore, the evaluation of the cost of fiscal measures and their targeting is fundamental to improve the efficiency and effectiveness of policy interventions. Using a microsimulation approach, this paper uncovers the aggregate and distributional impact of high consumer inflation, as well as the impact of the government measures aimed at supporting households and containing prices. This analysis is carried out for 2022 and includes Germany, France, Italy, Spain, Portugal and Greece, which together proxy for the euro area. Our work confirms that the purchasing power and welfare of lower-income households was more severely affected by the 2022 inflation surge than that of high-income households. Fiscal measures contributed significantly to closing the inflation gap, though with country differences. However, most fiscal measures were not particularly targeted to low-income households, implying a low cost-effectiveness in protecting the poorest in some countries.