Inflation and the social question

_ Alexander Jungbluth, junior economist, MIWI Institute for Market Integration and Economic Policy. Munich, 30 January 2022.

1. Introduction

The year 2022 was marked by exorbitant inflation. The consumer price index in Germany in November of the year was around 10% higher than in the same month of the previous year [1]. It is likely that this development will continue in 2023. Since the phase of high inflation has now lasted almost a year, the risk of second-round effects, for example through adjustments to wages and their consequential effects, increases [2; p.236].

This inflation has different effects on the individual economic agents. In the present study, the social impacts will be examined in particular.

The immediate impact is analysed in Chapter 2, i.e. the price effects on the shopping cart from a social point of view.

Chapter 3, on the other hand, deals with the financial adjustment options to the increased prices.

2. Goods differentiation

The high inflation rate of around 10% is mainly due to the high price increases for energy and food. The price increase of all other goods is “only” about 5% and thus about half as high as the overall inflation rate [1]. This means that the main drivers of inflation are basic necessities, which could already be an indicator that socially disadvantaged people in particular are more severely affected by inflation.

2.1. Energy costs

The main reason for the increased prices in Germany are the energy costs. In November 2022, these were 38.7% higher than in the previous year. It should be emphasized that the state relief measures are already taken into account here [1]. Without government involvement, the value would have been significantly higher.

Energy costs now need to be differentiated, as they affect both companies and private households. Expenditure on mobility and household energy is particularly relevant for private consumption. The price increases in these areas in May 2022 were 40.7% (mobility energy) and 36.8% (household energy) [3;390] and thus do not deviate significantly from the overall development.

For household energy in particular, the difference between consumption and income is most pronounced. According to calculations by the DIW, the lower income quantile needs 85.3 percent more for expenditure on electricity, gas and other fuels than the upper quintile [4; p.6] In contrast to household energy, the proportionate expenses for mobility energy are higher for the highest-income quintile than for the lowest [4, p.6]. However, this is mainly due to the fact that high-income people often own a car, and above all more expensive cars, and therefore have a higher energy requirement. Against this background, it is also questionable to what extent the costs for mobility energy can actually be included in the basic requirement.

However, since the expenses for household energy are significantly greater than those for mobility energy and in all social classes [3, p.391], the overall effect in the area of energy costs on the socially disadvantaged is greater.

In order to counter the development of higher energy prices, the federal government installed the so-called electricity and gas price brake.

The electricity price brake stipulates that, retrospectively as of January 1, 2023, a total of 80% of the previous year’s electricity consumption will be made available to consumers at a capped price of 40 cents per kilowatt hour; for gas, a price of 12 cents per kilowatt hour will be granted for 80% of the previous year’s consumption and 9.5 cents for district heating.[11] On the one hand, the advantage of this model is that it has an unbureaucratic core, on the other hand, it is criticized that everyone benefits from the brakes mentioned, so that there are also strong benefits for households that do not depend on help. [12, p.8]

2.2. Food

Food prices increased by 21.1% in the above said period. The price increase was more than twice as high as the average for other goods [1]. Here, too, calculations by the DIW showed that households in the bottom quintile spent 16.8% of their income on food, while higher-income households only needed 10.3% [4, p.6].

When it comes to food, it is particularly important to take social aspects into account that the shopping basket naturally grows as the number of children increases. The average German household spends around 10% of its household income, while a family with children spends 18% [5, p.360]. It is therefore to be feared that children in particular will suffer from the price increases in this area.

In order to enable households with lower incomes to eat appropriately, there is a discussion about whether VAT should be abolished for fruit, vegetables and legumes. Even with rising prices, this could encourage large sections of the population to eat healthier. [10]

2.3. Intermediate result

With rising prices in the energy and food sectors, inflation dynamics are driving prices of basic necessities in particular [3, p.389]. Since relatively less is spent on everyday things as income rises, the socially disadvantaged in particular are more directly affected by price increases. Against this background, it seems sensible to focus support measures on social aspects and to give special support to households that are already affected by poverty [6, p.1].

3. Income and Savings

While in Chapter 2 the burden was analyzed in relation to the basket of goods, the possibility of adjustment will now also be discussed with its direct or indirect financial consequences of inflation.

3.1. Adjustments to increased prices

With increasing income, the savings rate also increases [7, p.45]. This also increases the customization options. If your own shopping basket increases due to inflation, you have the option of reducing your savings rate in order to maintain consumption and thus your quality of life. The socially disadvantaged are therefore again affected by price increases, mainly because of low savings and few adjustment options. [3, p.389]

Again, it is not only the income as a person that has to be taken into account, but also the size of the family for which this is available. Studies show that families with many children also suffer more from inflation due to fewer financial adjustment options. [5, p.360].

3.2. Tax implications

From a social perspective, the cold progression is particularly interesting from a tax point of view. Cold progression is the additional tax burden that arises when income tax rates are not adjusted for inflation. This leads to an increase in the tax burden, while real purchasing power falls due to inflation. [8] If, for example, the inflation rate and income rise in parallel, the real gross wage is identical. However, the tax burden could increase if rates are not adjusted, causing real net wages to fall.

The federal treasury, on the other hand, is the beneficiary. According to calculations by the German Economic Institute, if the state were to adjust its tax rates in such a way that cold progression did not occur, it would have to forego around 12.1 billion euros from income tax and solidarity surcharge in 2023 and another estimated 12.4 billion euros in 2024. [9; p.2]. The additional tax burden from cold progression is not only borne by higher earners. The tax burden increases with an income of around 25,000 euros. [9, p.2]

To counteract the impact, a one-off adjustment of all tariff limits is proposed as an immediate measure, considering a 5% adjustment as appropriate at the current level of inflation. [6, p.3]

3.3. Intermediate result

From a social point of view, lower-income households have fewer adjustment options due to more limited financial possibilities and can therefore make fewer changes to their shopping basket. Furthermore, you are also affected by the effects of a cold progression and must therefore expect a higher tax burden.

4. Conclusion

Overall, lower-income households required higher consumer spending of around 18 percentage points to cover their basic needs. [4] In section 2 it could be shown that these suffer particularly from higher energy costs and additional expenditure for food due to the high prices. The effect of higher expenditure is further reinforced by the income side, which is examined in Section 3. There are fewer opportunities to adjust consumption and investments and thus restructure the shopping basket. In addition, households with relatively low incomes are affected by the tax progression. This means that there is an additional risk that the disposable income will fall in the event of simple tariff adjustments. Families are especially adversely affected by inflation.

A wide range of effects therefore suggest that the mechanisms of inflation hit those who are socially weaker and have more children more severely.


[1]       Statistisches Bundesamt- Pressemitteilung Nr. 529 vom 13. Dezember 2022

[2]       Wirtschaftsdienst (2022) 102(3),

[3]       DIW Berlin (2022):Folgen der Inflation treffen untere Mittelschicht besonders: Staatliche Hilfspakete wirken nur begrenzt; 89. Jahrgang

[4]       DIW Econ (2022): Belastung einkommensschwacher Haushalte durch die steigende Inflation- Kurzexpertise für die Diakonie Deutschland e.V

[5]       Brachinger, Hans Wolfgang (2008) : Wie stark sind unterschiedliche Bevölkerungsgruppen von der Inflation betroffen? Wirtschaftsdienst, ISSN 0043-6275, Springer, Heidelberg, Vol. 88, Iss. 6

[6]       WIFO, IHS (2022): Maßnahmen zur Bekämpfung der Inflation und ihrer Auswirkungen. Policy Brief Nr. 8/2022

[7]       Bundesbank (2016): Die Studie zur wirtschaftlichen Lage privater Haushalte (PHF)


[9]       IW-Kurzbericht 20/2022: Hohe Inflation entfacht Kalte Progression



[12]     ifo Schnelldienst 12/2022: Zwischen Notfallmaßnahmen und Strukturreformen: Wie den Energiemarkt zukunftsfähig gestalten?

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