Inflation Losses

Citizens of both the US and the EU have learned to live, in recent months, with the resurgence of the phenomenon of inflation that has re-emerged sharply since it was last recorded in early 2011. Adapting to the new reality should be done immediately, as the impact on disposable income is already here as well as the concern about rising money costs.

Price increases, especially in energy products, but now also in food, increase the cost of living by as much as 8% to 10% for a household with an income of around 1,500 euros, despite the subsidies already implemented by the US and EU governments respectively. The consequences for lower-income households are no greater, as inflation hits the poorest rather than the highest-income households, widening income inequalities.

Who is at risk of even more pressure on their disposable income?

Those who service loans with floating interest rates. Recently, the new loan agreements can be concluded with fixed interest rates, however, the main volume of loans is with a floating interest rate. Borrowers servicing these floating rate loans will face an additional financial burden once the Central Banks decide to adjust their interest rate policy.

The lower the income, the greater the damage caused by the increase in the cost of natural gas, electricity, fuel and especially foodstuffs. This is because the consumption of these goods moves horizontally, which means that the financial burden in absolute numbers remains the same whether the income is 800 euros per month is 1,600 euros per month.

The effects of inflation are many and varied, depending on whether the debate concerns public debt, the state budget, household income or the operating costs of the business. This is a complex equation that can not be solved from now on as it remains to be seen in the near future whether inflation will push both wages and interest rates up. Particularly:

1. It is a given that the household is already under pressure on its disposable income, with the reasoning that the price increases as reflected in the December inflation data mainly concern energy and now also food. Disposal of disposable income may exceed 5% on a monthly basis which is currently the average monthly inflation in the US and the EU.

2. The company suffers from the increased operating costs especially due to the price increases in energy and is called to decide if and to what extent it will pass the increased costs to the customer through the price increase of its products. December inflation data and January price lists show that more and more companies choose to increase their prices, which is why, especially for the first quarter of this year, further inflation is expected to increase even more than 5.5%, which will of course depend on the course of the price of oil and gas respectively. The main goal for the company is to increase the cost of money as loans are a key element of their annual budget.

3. For public debt, inflation can work positively at this stage. Since administrators – public debt management agencies – in all countries have ensured through appropriate swaps agreements to lock the cost of servicing public debt, which means that the respective state will pay the amounts, as annual interest, will remain stable. regardless of the course of interest rates and bond yields. In this case we are talking about a successful management of an independent if inflation has increased. On the other hand, inflation also means higher nominal GDP and therefore an improved debt-to-GDP ratio.

4. At the state budget level, inflation can lead to increased tax revenues, mainly through VAT, provided, of course, that no reduction in consumption begins to be recorded. It is estimated that at least for the coming months, a reduction in consumption is not expected as most countries have entered a growth trajectory. The additional tax revenue can help the financial staff to finance support measures for households. Especially for the households that will be most affected by the increased cost of living, the possibility of announcing additional support measures for vulnerable groups, the long-term unemployed and low-paid is increased in the coming months and will depend on the implementation of state budgets and which will receive the wave of revaluations.

5. For GDP, inflation implies increased imports mainly due to the more expensive energy in the countries that import energy, and therefore pressures on their GDP. Their energy balance will be pushed even harder, which is attributed to rising gas and oil prices. An increase in imports is pushing GDP down, which means that a country’s development prospects are also being squeezed.

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TRUST ECONOMICS

Trust Economics is a specialized independent economic research, analysis and consultancy business. Our team provides ingenious analysis in the macro & micro economic field, in the field of financial market, regional and sectoral analysis equally, forecasts, consultancy, specialized studies-research/projects from its headquarters in Athens, Greece.

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