The tripartite committee during the 22 March 2022 discussions between the government and the social partners. (Image: Guy Wolff/Maison Moderne/Archives)

The tripartite committee during the 22 March 2022 discussions between the government and the social partners. (Image: Guy Wolff/Maison Moderne/Archives)

The Idea Foundation has published an analysis, evaluating the impact of energy inflation on household budgets in 2022, considering the scenario before and after the implementation of the government’s support measures.

In seven months, the average price of energy has risen by 41%, with particularly pronounced increases for gas and oil. This price hike is having an impact on the disposable income of households, especially the most disadvantaged.

Luxembourg think tank Idea’s study is based on Statec data from August 2021 to March 2022, and anticipates the disposable income of households for the remaining nine months on the basis of the compensation measures taken during the tripartite discussions on 31 March 2022.

This is assuming that prices remain stable from March onwards. Idea’s methodology was to classify households into five typical categories according to their income, from the lowest (€35,000 per year) to the highest (€120,000 per year), based on two equal salaries per household.

A typical household earning an annual €35,000 will lose about €1,000 in purchasing power, or 2.9% of its disposable income, as a result of this 41% inflation, whereas a couple earning €120,000 per year will concede €1,300, which represents only 1.1% of its disposable income.

While the indexation of salaries (taking into account the tax rate) triggered in October of last year certainly compensates for the figures indicated above, it does so in an inequitable and paradoxical way.  Indeed, it mainly benefits the highest incomes. Thus, a high-income household will gain €214 net after indexation, while the low-income household will lose €364 per year.

Accumulation of measures matters

The accumulation of measures taken by the government to compensate for the loss of purchasing power due to energy inflation will, however, according to the Idea Foundation's forecasts, reverse the trend if we recalculate by anticipating the last seven months of the year. Against this backdrop, the postponement of the next wage indexation to April 2023 is in any case a brake on the effectiveness of these measures and affects the least well-off households more heavily.

However, when the latter manage to combine the cost-of-living allowance (revalued to €250 in January 2022), the energy tax credit (from August 2022), the one-off energy bonus (€250) and the reduction of 7.5 cents per litre, the net impact on their budget after the measures goes from negative (€364 per year) to positive (+€660 per year).

Benefitting only from the energy tax credit and the reduction in prices at the pump, wealthy households find themselves losing out, with the impact going from positive (€214 per year) to largely negative (€-892 per year). The financial compensation can therefore be described as targeted and redistributive, but remains unequal. According to the study, only households earning less than €65,000 per year will witness a positive net impact after measures.

The Idea Foundation warns that this study represents a snapshot at a given moment in time, with the calculations based on the conditional stability of energy prices from March to December 2022. The prices are, however, linked in particular to the war in Ukraine and the sanctions against Russia.

This story was first published in French on . It has been translated and edited for Delano.