The differential impacts of the cost-of-living crisis

The Competitiveness for Wellbeing Framework that we work with at Orkestra includes material life as one of the seven dimensions of wellbeing that form the ultimate goals of territorial competitiveness. In our Regional Competitiveness Observatory, we measure material life with indicators that reflect the monetary resources available to households and the inequality in the distribution of those resources.

In times of relative stability, the material wellbeing of a population tends to only change slowly. However, the last few years have been marked by the COVID-19 pandemic, the war in Ukraine and a series of related market shocks that have led to significant levels of inflation. The so-called cost-of-living crisis impacts on the material life of all people, but it does not affect all groups equally. It is particularly important, therefore, to understand the impacts on the poorest or most vulnerable groups in society. In this post we present the analysis we undertook in the Basque Country Competitiveness Report 2022 to this effect, using household expenditure data to explore the heterogenous effect that surging inflation has had on different groups of households in the Basque Country.

An initial understanding of how the beginning of the pandemic affected the most vulnerable groups can be gained by observing how the percentage of people at risk of poverty or exclusion has changed. In the case of the Basque Country, the measures implemented during the pandemic helped lower this number in 2020 (from 15.0 to 13.6). However, in 2021 the percentage increased considerably, rising to 16.0, higher than the pre-pandemic level. 

MAP: Change in the percentage of people at risk poverty or exclusion in Europena regions.

Source: Eurostat

NB: The data for some countries, including France and Germany, are not available with a regional breakdown.Therefore, the annual growth rate has been applied to all regions. 

Delving deeper to analyse the impacts of the inflation that we have experienced over the last couple of years, it becomes evident that it has not had the same impact on all households. This is because the prices of different goods have not increased to the same extent, and the average composition of consumption baskets differs according to income level. If we break down household spending by income level before and during the pandemic, we can see that lower-income Basque households spent proportionality more on food and on housing & energy, and proportionately less on clothing & shoes and on transport & communications. Food and housing & energy are also the items that reported the biggest increase in spending between 2019 and 2021 at all household income levels.

GRAPH: Breakdown of household expenditure by household income level.

Source: Eustat, Family Expenditure Survey. Compiled by authors.

NB: Housing and energy includes ‘Housing, water, electricity, gas and other fuels’ and ‘Furniture, household articles and articles for day-to-day household maintenance’. Other services includes ‘Health’, ‘Leisure and culture’,
‘Education’, ‘Restaurants and hotels’ and ‘Other goods and services’.

These changes in spending patterns may be due to changes both in prices and in the quantities of different goods consumed (for example, the tendency to spend less on transport and more on food or energy during the pandemic lockdowns). To measure the differential impact of inflation on households we can calculate, for different income segments, year-on-year changes in expenditure alongside changes in the cost of consumption baskets from earlier years (see table below).

TABLE: Changes in expenditure and cost of consumer baskets by household income level.

Source: Eustat, Family Expenditure Survey. Compiled by authors.

In the first year of the pandemic, household spending dropped in all income segments. The reason is that there was a decrease in the quantities purchased for all spending items. Moreover, the average price of some items (such as transport and communications and housing and energy) fell. This was a greater benefit to lower-income households, for which housing and energy account for more than half of all spending. If they had purchased the same quantity of goods as the previous year, they would have cost 1.3% less (compared to a 0.8% decrease for higher-income households).