Euro’s different impact on low and high incomes

Inflation does not have the same impact on different social groups, as they consume the available goods and services in the typical shopping basket in different quantities, a study by EFG Eurobank shows. Less prosperous households spend a comparatively greater proportion of their incomes on food and housing, while those in upper-income brackets spend comparatively more on transport, recreation, hotels or educational services, the study concludes. As the prices of various goods and services fluctuate at varying speeds, lower-income groups usually face a different impact from inflation than those with higher incomes. The study constructed separate consumer price indices (CPI), based on different «baskets» for the wealthy and less prosperous since 1990. The main findings were as follows: – Over the last 17 years, the average divergence of the «rich people’s» inflation from that of the «poor people’s» is almost zero – just 0.09 percent for the entire period. – The introduction of the euro in Greece was not accompanied by a greater difference in inflation in the context of «rich» and «poor.» Therefore the euro did not exacerbate economic inequality as price rises in goods and services could have. Nevertheless, the introduction of the euro was followed by a wider divergence between rich and poor at the expense of the poor in the fluctuation of inflation. The study presents three arguments in support of this view: First, after January 2001, the difference between the additional inflation of the poor and that of the rich, as a fraction of the inflation of the average household, showed a substantial increase and a sharper fluctuation compared to the pre-euro period. Second, the ratio of the typical divergence of the poor man’s CPI to the typical divergence of the rich man’s CPI rose after January 1, 2001, from 1 to 1.5. Inequality, therefore, at the level of uncertainty intensified. Third, the poorer the household, the more pronounced the uncertainty relative to prosperous households. It is the first time a study points to a worsening of inequalities following the introduction of the euro. The study was headed by Professor Gikas Hardouvelis, economic adviser to the EFG Eurobank group.