Energy price inflation in the Eurozone: government responses and impact on household purchasing power

The sharp rise in energy prices since April 2021 has been the main driving force behind the current surge in Eurozone inflation. The outbreak of war in Ukraine on 24 February accentuated this trend, sending the energy component of the harmonised index of consumer prices (HICP) up 44.4% y/y in March 2022.

Faced with this situation, the governments of the four main Eurozone economies under review in this article have acted to try to buffer the shock on economic players, and notably on household purchasing power, via direct subsidies, tax cuts, price regulations and measures to boost nominal incomes.

Although their actions have clearly helped ease the rise in energy costs, they have not prevented a loss of household purchasing power thus far in 2022, even though it is expected to be relatively mild. Moreover, they have not prevented inflation from spreading to other components of the consumer price index (see chart 1).

The increase in energy prices is the main driving force behind the surge in eurozone inflation, despite significant differences between member states

Energy made the biggest contribution to the increase in consumer prices in the Eurozone. In March 2022, the energy component of the harmonised index of consumer prices (HICP) increased 44.4% year-on-year (y/y) (see chart 2). Since this component accounts for an average of 11% of household expenditures, energy contributed nearly two thirds (65.6%) of the increase in headline inflation in March 2022. Yet this overall figure masks important disparities between the main Eurozone economies (see chart 3). In Italy and Spain, where energy prices jumped by 50% y/y, the contribution was more than 70% (73.6% and 72.3%, respectively). The increase in energy prices in Germany and France was nearly two times lower than for their southern European counterparts, the contribution was smaller at 59.7% and 60.3%, respectively (see chart 3). In April 2022, the energy component rose at a slightly slower pace (+38% y/y vs. 44% in March), but still contributed more than half of headline inflation (55.3%). Assuming there is not another surge in international energy prices, the relative importance of this component should gradually decline due to second-round effects and a stronger upturn in non-energy inflation.

Energy’s contribution to inflation differs between countries due (i) to the various dynamics of the sub-components of energy, and (ii) to the weighting of these different energy sources in household consumption. In the Eurozone, electricity stands out as one of the key factors behind the increase in the price index (see table 1). It had a double impact on households due to a price effect and to the higher weighting of electricity as a share of household spending. Even so, major differences exist between countries. In Spain, electricity was the biggest contributor to price increases in March 2022, while natural gas and fuel, respectively, stood out in Italy and Germany. France stands apart from its European neighbours due to the mild increase in regulated electricity prices.

Germany

Until February 2022, the German government mainly acted via subsidies to low-income households and tax cuts on renewable energies (Renewable Energy Sources Act, EEG). These two measures amounted to less than EUR 10 bn. Yet surging energy prices, amplified by the war in Ukraine, have pushed the governing coalition to step up efforts to preserve purchasing power: reductions in the price of public transport tickets, rebates on fuel prices, a one-time EUR 300 transfer for taxpayers, and higher social welfare benefits for low-income families were all part of the EUR 15 bn programme announced on 24 March 2022.

France

France is one of the most proactive Western European countries in terms of anti-inflationary measures. A “tariff shield” was set up in October 2021 and is comprised of subsidies to low-income households in the form of energy voucher and inflation payments, as well as a freeze on regulated natural gas prices and a 4%-cap on electricity price increases. Price regulations account for nearly half of the funds budgeted to preserve household purchasing power. The ongoing rise in market prices and the extension of the freeze on natural gas prices through year-end 2022 (initially expiring in June) could add another EUR 10 bn to the cost of these measures this year, compared to an initial budget of EUR 1.2 bn³. New measures were announced that will be implemented before the summer, and will further expand this line of attack, including food vouchers, public sector wage increases and higher pensions.

Italy

Harder hit by higher natural gas prices than the other European countries, the Italian government’s measures are targeted primarily to households and companies that predominantly use this source of energy. At the end of Q1 2022, most of the fiscal support measures implemented since October 2021 were comprised of a reduction in the VAT rate on natural gas, the elimination of the charge system and the social bonus. EUR 11 bn was spent between January and March 2022 out of a total budget of EUR 23.4 bn. In April 2022, however, the Bank of Italy indicated that the financing of these measures “should be covered by a reduction in other expenditures and by an increase in tax collection, including extra public revenues from a windfall tax on energy providers”.⁴

Spain

Compared to its European neighbours, the Spanish government was the first to respond to the rise in energy prices. Starting in June 2021, it began reducing two key electricity tax rates, including the VAT rate. These measures targeted consumers in particular, who had seen their energy bill double in March 2022 (+108% y/y in March 2022, nearly 60 points more than the Eurozone average). After the outbreak of war in Ukraine, new measures were announced that mainly target pump prices (rebates per litre of petrol, support for agriculture and ground transportation), notably in response to massive protest movements that have spread across large parts of the country in recent weeks. The cost could rise even further following the proposal to regulate natural gas prices for electrical power generation, which the European Commission granted in 26 April 2022.

1 These figures are lower than the officially announced measures for two main reasons: 1. our estimates exclude all measures that were not directly related to curbing energy price increases (for example, we excluded new household and corporate credit lines, as well as the ceiling on rent increases introduced in Spain); and 2. in some cases, given the lack of available data, we had to extrapolate or estimate the cost of a measure based on minimum levels.

2 Yet, the EU Commission approved an initiative of gas price freeze at EUR 50/MWh, jointly proposed by Spain and Portugal as of 26 April 2022. As of the writing, the project is still under development.

3 Interview with Bruno Le Maire, BFM TV – March 2022 Price shield : Bruno Le Maire indicates a cost of « more than Eur 20 bn » - (https://www.bfmtv.energie/bouclier-tarifaire-bruno-le-maire-evoque-un-facture-de-plus-de-20-milliards-d-euros_AV-202203070188.html)

4 Economic Bulletin, April 2022 (en-boleco-2-2022.pdf (bancaditalia.it))

5 The change in purchasing power not benefitting measures (labelled «without measures») is calculated from AMECO’s gross disposable income forecasts for 2022, because, as the forecasts were published in November 2021, we consider that they did not yet include the measures announced by governments and deployed in 2022. We then deduct the change in purchasing power benefitting from «with measures» by adding to the GDI forecasts the amount of these various measures at work or announced for the year 2022. This method is applied for Italy, Germany and Spain. An opposite but equivalent approach is carried out for France: from BNP Paribas’ GDI forecasts for 2022, in which the measures are already incorporated in the form of social benefits or gross salary increases, we remove the various amounts from this GDI forecast. We also incorporate gas and electricity price regulation measures and fuel-price rebate into headline inflation. This then allows us to obtain the change in purchasing power «without measures». 6 According to the AMECO Spring Forecast released in May 2022, the nominal gross disposable income is projected to rise by more than initially projected in November 2021 for the full year of 2022. This is mainly due to the inclusion of energy-related measures and strong labour labour market improvement. However, these factors will not prevent real household disposable income to decrease by 2.8%, at the EU level in 2022, according to the projections. 7 This spread is calculated based on counterfactual inflation that would be 1.5 points higher than the year-on-year figure of February 2022 without the freeze on electricity and natural gas prices, and 0.5 points higher without the rebates on pump price of May 2022, according to INSEE estimates (Note de Conjoncture, March 2022 - ndc-mars-2022.pdf and April 2022 -Point de conjoncture du 9 mai 2022 - Point de conjoncture | Insee)