UniCredit Bank Austria analysis:
Above-average burden on low-income households due to rising inflation
- Ukraine conflict accelerates rise in living costs for Austrian households, especially for residential energy
- These increases disproportionately affect the lowest-income populations as the share of the total budget expenditures on the necessary costs of living (household energy, rent and food) among the one-fifth of the population with the lowest income is twice as high as the one-fifth of the population with the highest income
- For households in the one-fifth of the population with the highest income, the essential costs of living account for 20% of total individual inflation, while for the one-fifth of the population with the lowest income, they account for almost 30%
- Fiscal compensation measures to cushion rising living costs should, for economic reasons, focus on lowest income groups and on necessary costs of living, in particular to support consumer spending
The sharp rise in inflation, driven by energy prices, is placing an increasing burden on Austrian households. "For economic reasons, fiscal policy measures to reduce rising costs of living should remain focused on the lowest income groups and exclusively on the costs of living that are really necessary", says UniCredit Bank Austria Chief Economist Stefan Bruckbauer, adding: “Direct transfers to help with rental, residential energy and food costs for particularly affected households or adjustments to wage and income tax are preferable as an energy cost compensation. In the case of general, un-targeted measures—such as a reduction of VAT on fuel, a reduction of oil tax or an increase of the commuter allowance and the commuter euro, some of which are included in the new energy package of the Federal Government—there is a risk that high-income households with a high propensity to save are subsidised by lower-income households who are at their budget limit."
Sharp rise in living costs that are really essential
In February 2022, inflation rose by 5.9% year-on-year. The energy price increase has been particularly sharp due to the escalation of the Ukraine conflict. Residential energy was up 25.3% year-on-year. There was a particularly sharp spike in prices for liquid fuels, with an increase of 48.9% compared to the previous year. At 64.3%, the increase in gas prices was particularly strong due to increased uncertainty surrounding supplies. In the wake of the increase in gas prices, the price of electricity also rose (+14.9% compared to the previous year). The price increase for fuels in February 2022 was a high 29.1% year-on-year. The cost increase caused by the long-term rise in energy prices is now having a strong effect on food prices for final consumers. Food prices rose by 4.3% in February compared with the previous year, and are expected to continue to rise sharply due to the war in Ukraine as the country has previously been a global heavyweight in wheat and maize exports. By contrast, rents actually paid in February fell slightly by around 2% year-on-year. However, over the longer term, rents have been a strong driver of living costs: In the last five years alone from 2017 to 2021, rents in Austria rose by more than 18%, or more than 3.5% annually, with general inflation of only 2% over the same period.
Low-income households more heavily burdened
"The current price increases are particularly challenging for low-income households as they have to spend an above-average proportion of their household expenses on essential costs of living such as rent, food and residential energy. For the bottom one-fifth of the population, i.e. the 20% of Austrian households with the lowest income, this item accounts for almost a third of total household expenditure. For the top one-fifth of the population, however, the proportion of essential costs of living is only half, at 16%", says UniCredit Bank Austria Economist Walter Pudschedl.
The sharp rise in the living costs that are really necessary, taking into account the varying proportions of individual households' consumer expenditures, leads to a significantly higher price increase for households in the lower income segments. On average, the proportion of essential living costs is almost 22% of total household expenditure in Austria. This is currently resulting in an impact of these categories on overall inflation, which is slightly above the average at 24.5%. "While the essential costs of living are only responsible for about 20% of the total individual inflation for the top fifth of Austrian households, this proportion is almost 30% in the lowest income range", says Pudschedl.
“The heavier burden on low-income households is not only a result of the comparatively higher concentration of expenditure on necessary costs of living, but also the lower absolute household income", says Pudschedl, adding: "The lower income groups have very few savings, so the sharp rise in living costs cannot be offset by reserves, but leads directly to a restriction of consumer spending".
In households with the lowest income, household expenditures even exceed income since larger purchases in particular are often financed by alternative sources of money, such as loans. In households that generate the most income, however, income is in some cases significantly higher than household expenditure, meaning that an increasing proportion of income can be saved.
By contrast, high-income households particularly hit by rising fuel prices
The economists at UniCredit Bank Austria do not include expenditure on fuel used for operating private means of transport in the necessary living costs since, in most cases, alternatives are available through public transport; consumer spending on food, residential energy or rental costs, however, have no alternative. In addition, the share of total household expenditures spent on operating private means of transport increases disproportionately with rising incomes. The share of household expenditure on operating private means of transport is only 5% in the one-fifth of the population with the lowest income, while in the one-fifth of the population with the highest income the share is over 50% higher at around 8%. This situation means that the sharp rise in fuel prices puts a much greater burden on high-income households, which often have several cars with higher performance capabilities and fuel consumption, than on low-income households, which often do not have any private means of transport. The burden of higher fuel prices is therefore particularly affecting households with a high savings rate, who can compensate for the increase in costs with existing reserves without having to restrict their consumer spending.
Energy cost compensation — but how?
A broad political debate is currently taking place on how energy cost compensation could be achieved as accurately as possible. The following statement results from the different expenditure shares for the sharply rising costs of living and the varying propensity to spend as consumers, especially the high propensity of the lower income groups to spend money on consumer expenses while they are close to their budget limit: Fiscal measures to reduce rising costs of living should be targeted at the lowest income groups not only for fairness, but also for economic reasons, and should be exclusively geared towards the costs of living that are really necessary.
Further information can be found at:
Rise in the cost of living burdens Austrian households,
UniCredit Bank Austria, March 2022
Enquiries
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;
Email: walter.pudschedl@unicreditgroup.at