In 2021 and 2022, the prices of energy goods increased dramatically, affecting households with lower expenditure levels more heavily, due to the relatively higher weight of those goods in their consumption basket. Using Italian data, the paper quantifies the impact of energy price increases on the gap between the inflation levels experienced by households with different spending capacities.
Due to the lower price elasticity of energy goods to the business cycle, the increase in interest rates necessary to counteract rising inflation tends to widen the gap between households in the short term. Although the distributive effects of monetary policy unfold also through other channels, which are not considered here, the findings of this paper suggest that the unintended effect of monetary tightening should be offset by fiscal policies targeted at the most affected households.
