The impact of unexpected inflationary shock in 2022 and 2023 on the welfare of families: The case of Slovakia

The Russian invasion of Ukraine and resulting energy crisis have led to an unprecedented surge in inflation and living costs of European consumers, with an above-average manifestation in Slovakia. The higher inflation in Slovakia, compared to European average, can be explained by a growing body of literature using the Household Budget Survey data (HBS) assessing the impact of the recent high inflation episode on European consumers.¹ Sologon et al. (2023) conclude that the impact of inflation depends on a combination of the price increase and goods’ specific budget shares. Since budget shares for necessities such as food, domestic fuels or electricity are higher in poorer countries, in combination with a higher price growth in these necessities, this has resulted in a higher inflation in poorer countries. Menyhert (2022) comes to the same conclusion that recent consumer price inflation has disproportionately affected households in poorer EU member states or with below-median income.

At the same time literature suggests that in countries experiencing the highest inflation, low-income groups faced a much higher inflation rate than high-income groups (see for example, Causa et al., 2022). However, Claeys et al. (2022) admit there are outliers from this pattern.² Similarly, Sologon et al. (2023) conclude that similar levels of regressivity of inflation may come out from a different interplay between the level and the disproportionality of inflation across the income distribution. We show that in Slovakia, the inflation gap between poorer and richer households was narrow in 2022 (2 p.p.), but it widened in 2023 (6 p.p.) assuming that increased energy prices would be incorporated into the households’ energy contracts.

Slovak government, as other ones, adopted fiscal measures to shield households from high price increase. If looking strictly at the measures adopted in response to the price shock, 67% of measures adopted during the years 2022-2023 were untargeted. This is in line with the European average of 73% as reported in the Bruegel dataset on national fiscal policy responses to the energy crisis.³ On the two-year horizon, the size of these interventions in Slovakia was comparable to the European average too (1.7 vs 2% GDP). In addition to the anti-inflationary measures considered above, the Slovak government has also adopted a generous income support for families with children. It is a permanent measure, and while targeted on a specific part of population, a significant part of it is directed to high-income families.

The interventions of Slovak government, alike those of its European counterparts, were quite far from a first-best intervention scheme that should be adopted at a time of an inflationary episode. The lessons learned from recent developments are formulated by Sgaravatti et al. (2023). Government interventions should be temporary (to avoid driving up aggregate demand excessively in the medium term), tailored (not weaken incentives to cut energy demand, but rather encourage energy savings) and targeted (should shield vulnerable households who are most affected by the reduction in purchasing power). Moreover, Arregui et al. (2022) argue that governments should prioritise targeted income transfers that are adjustable to both the income level of the recipients and their exposure to energy price shocks. Ideally, these measures should expand to citizens outside existing social schemes and top-up support to people already covered.

The aim of our paper is to analyse the distributive effects of the recent inflationary shock on Slovak households. First, we look at the uncompensated effect of a price increase on households’ welfare. Then we quantify to what extent were the households compensated for the drop in welfare through the following channels: adopted government measures, economic adjustments in the form of inflation-induced wage growth and an extra valorisation of social benefits.

We employ an analytical approach combining a static tax-benefit microsimulation model with data on households’ expenditures. This approach has been used recently by researchers to assess the effect of inflation on the welfare of households along with the effect of government measures adopted to insulate the households from these effects.⁴ These studies do not take into account the behavioural responses to price changes, the exemption being Sologon et al. (2023).

Some of the authors go beyond and, on top of the effect of government measures, also analyse the effect of labour income channels and net nominal positions of households.⁵ This stream of literature concludes that it is age, more than income, that drives heterogeneity in the costs of inflation. The reason is the strong life-cycle profile in net nominal positions. These authors use access to bank data and combine micro and macro approaches.

In our paper we stick strictly to the microsimulation approach using SILC and HBS datasets that can simulate static or “day after” effects only. Therefore, we omit behavioural response or general equilibrium in our analysis. Since the most important price changes are for necessities such as food and energy, the behavioural response, in terms of the change of consumption basket, has a limited impact.⁶ Moreover, the result from linking the microsimulation and dynamic general equilibrium model shows that the second-round effects of the policy reform are rather limited.⁷

We look at changes in purchasing power as a measure of welfare change. The economic welfare of household is usually proxied by measures of consumption or income.⁸ Deaton and Zaidi (2002) points out, the consumption is a theoretically more satisfactory measure of material well-being. In our approach we measure changes in household consumption welfare using money metric based on the concept of compensating variation This concept defines the monetary compensation that households should receive after a price hike to maintain the same utility as they had before the price change occurred. In our static framework we abstract from the substitution effect, by assuming that households keep the same utility when consuming the same bundle of goods and services.

Our analysis offers two perspectives. We analyse the effect of the inflationary shock in isolation, and we also analyse total changes in purchasing power over the period of the inflationary shock. When assessing distributional effects, income dimension is the natural first choice. However, during the period of high inflation, Slovak government adopted measures that were targeted at specific population groups, such as families with children or pensioners, giving them generous support while leaving the rest unsupported. Therefore, we consider it useful to look at another dimension, besides income, too. We also present the results for households with different family structure.⁹

We come to the following conclusions. The net effect of price shock, after both government compensations measures and economic adjustments, leads to a welfare drop in 2022 for an average family and to a welfare increase in 2023. The reversed results are mainly due to a lag in the automatic indexation mechanism for social benefits and frictions in wage adjustment. When considering the two-year horizon, the combination of policy measures and economic adjustments were close to offset the negative effects of the inflation surge.¹⁰ However, if we also account for a generous income support for families with children (a measure of permanent character that we consider unrelated to price shock), the resulting increase in disposable income of families significantly exceeds the inflation burden.

We show that welfare increased for all analysed family categories during the recent period of inflationary surge, when looking at the total change in purchasing power (i.e. including the effects that would have occurred also in the absence of the inflationary shock). Our results indicate welfare gains of 9% for an average family, with significant variation across categories (5-11% for different income categories and 5-30% for different family structures). Like Eckerstorfer et al. (2024) we show significant heterogeneity of the impact across families. Welfare increases, presented for an average family in each category, do not apply for all the families. There are 14% of families facing a reduced welfare.

When assessing distributive effects, we come to similar conclusions as Amores et al. (2023). In Slovakia, as in the European countries they analyse, the energy price cap significantly reduces the negative effect of inflation across income distribution and reduces the inflation gap between poorer and richer households. In Slovakia government measures contribute more to closing the inflation gap than did the price cap on energies. Our results, in line with literature, suggest progressivity of income support measures and of the valorisation mechanism. Whereas the effect of wage growth is regressive.

The rest of the paper is organized as follows. Section 2 describes the development of inflation and government measures adopted during the years 2022 and 2023. Section 3 presents modelling approach used in this study. In addition, it briefly describes the assumptions applied in the simulation. Section 4 discusses the results of the analysis. It describes the effects for different income deciles and for different family types. Section 5 concludes.

Slovakia, like other European countries, has been confronted with an unprecedented high inflation rate since the second half of 2021. In 2021 the increase in price level was related to the post-pandemic economic recovery. In 2022 the most decisive drivers of high inflation, common for all European countries, have been high energy prices, induced by the Russian invasion of Ukraine. Due to the war, international trade has been hampered, the prices of commodities and inputs increased, thus leading to the increase of final product prices as well.

Compared to other European countries, Slovakia faced above average inflation in 2022 (HICP of 12.1 for Slovakia vs. 9.2 for European average (EU 27), see Figure 1). The same is true for the increase in food prices (18.6 vs. 11.9). Due to strict regulation settings in network industries, energy prices for households did not rise as much as in other European countries (16.5 vs. 42.4). Increased market electricity and gas prices were only partially reflected in the prices for households in 2022, as in Slovakia the regulated prices are adjusted just once a year (in January). Thus, an increase in market prices over 2022 would only be transmitted into the customer prices in 2023. Obviously, final consumer prices were indirectly affected by the high energy prices via increased costs of other consumer goods and services.

Figure 1

Download asset Open asset

Although not as dramatic in international comparison, the rise in energy prices was one of the main contributors to the total inflation rate growth in 2022, along with the increase of the price level of food items (see Figure 2). The energy prices, included in the category housing, water, electricity, gas and other fuels,¹¹ jumped in January 2022. The contribution of this category to the total price level changed from 3.3 p.p. in January to 4.5 p.p. in December 2022. On the other hand, Slovak households were witnessing a steady growth of food prices starting in the second half of 2021, with a contribution to total inflation starting at 0.6 p.p. in July 2021and reaching 5.8 p.p. in December 2022. The year-on-year increase in food prices was almost 30% at the end of the year 2022. Similarly, the prices in category other services started to grow at the end of the year 2021, although their contribution to the overall inflation was not as important as in the case of food or energy.

Figure 2

Download asset Open asset

While the market energy prices rocketed in 2021 and 2022 in Europe, the Slovak government decided to keep the regulated energy prices flat for Slovak households in 2023. We estimate that without the price cap, the regulated prices of electricity would have increased by 67%, the prices of gas by 200% and heating by 112%. By adopting two Government Regulations, a memorandum with the main electricity supplier and via subsidies, the Slovak government capped energy prices for households in 2023. These measures hold electricity prices for households almost flat, while natural gas and heating prices are higher by approximately 15%.¹²

As a result, the contribution of category housing, water, electricity, gas and other fuels to the headline inflation started to decrease in January 2023. The decline continued throughout the year and reached a level of 1.6 p.p. in December 2023 (see Figure 2). The contribution of food prices decreased from April and landed on 1.5 p.p. in December 2023. For these two main reasons, the overall inflation reversed the trend and fell in every month of 2023.

Except for the price cap on energy prices, the government has adopted several other measures to increase the disposable income of families. Some of them were adopted in response to higher food and energy prices, and thus, can be classified as measures related directly to the inflationary shock.¹³ These measures reached the volume of 319 mil. euros (0.3% of GDP) and 3 602 mil. euros (3.1% of GDP) in 2022 and 2023, respectively and are included in our analysis when assessing the effect of the inflationary shock. Moreover, the government has also adopted measures that we consider unrelated to the price shock. These measures would have been adopted anyway and they significantly increased the disposable income of affected families. Therefore, they are included in our analysis when looking at total changes in economic welfare of household. The total volume of all government measures was 717 mil. euros (0.7% of GDP) in 2022 and 4 648 mil. euros (4% of GDP) in 2023.

When looking at total budget allocation to support Slovak households (see Table 1), half of the financial help was allocated to untargeted price measures (49%). In 2022 most of the government support was directed to targeted income support measures (it is 100% if we do not consider the impact of the reduced distribution fee). In 2023 the situation was reversed, with 57% of measures directed to untargeted price measures. If looking strictly at anti-inflationary measures, 67% of measures were untargeted at the two-year horizon, which is in line with the results reported by Sgaravatti et al. (2021) as an average value for European countries.

In 2022 two rounds of income support measures were adopted by the government as a response to the price shock. They consisted of one-off benefits paid to vulnerable households, uniformly 100 euro per household. Exception was made for families with children, when the support was per child. Details can be found in Table A1 in the Appendix. In addition, the government supported the pensioners by one-off payment of the so-called 14^th pension benefit. Another two measures that were adopted in 2022 we classify as measures unrelated to the inflationary shock. First, a vaccination incentive bonus to those citizens who got vaccinated against COVID-19 disease and were older than 60 years. Second, income support measures targeted at families with children (a permanent increase of a child tax credit and child benefit). Details on the structure of income support measures targeted at families with children and at pensioners can be found in Tables A2 and A3 in the Appendix.

In 2022 there were no direct government measures capping energy prices for households. Nevertheless, the Regulatory Office for Network Industries succeeded in reducing the costs of electricity distribution and transfer (by 4%) for households, which mitigated the increase in the final price of electricity for households. For simplicity reasons, we abstract from this measure reducing electricity distribution fees in 2022 in our analysis.

Regarding 2023, the most voluminous measure related to the price shock was the price cap on energies for households mentioned above. Households would have paid 1,320 euros more, on average, for energy in the absence of these measures (2.64 billion euros in total). Also, in response to the price shock, the government amended the indexation mechanism of pensions, bringing forward an increase of pensions. This measure ensured that pensioners had their pensions increased in advance by 6 months (in July 2023 instead of January 2024). On top of that, all pensioners received a one-off allowance of 300 euros in December 2023 as an additional support to increase their disposable income.

Like in 2022, we include into our analysis the effect of income support measure targeted at families with children, which we consider unrelated to the price shock. This measure was adopted already in 2022, but it was extended in 2023 by significant increases in the child tax credit and the child benefit (see Table A2 in the Appendix).

Not only families were subsidised during the period of price shock. The government also adopted several schemes to support companies, municipalities, or selected groups of vulnerable customers and helped them to lower the energy costs. The estimated size of all those measures is 455 million euros (see Table 1). However, this study focuses on family expenditures and does not include measures targeted to firms.

In our analysis, we choose to look at changes in purchasing power as a measure of welfare change. Generally, we analyse two channels that can directly affect the purchasing power of households. First, inflation: higher prices of goods and services mean households can buy less, reducing their purchasing power. Second, nominal disposable income: higher income allows households to spend more, thus increasing their purchasing power. In our static exercise, we do not consider changes in households’ savings, thus it does not affect their purchasing power.

When looking at the results, we adopt two perspectives. Using the first perspective, we show the isolated impact of the inflationary shock. We look at the impact of increased prices on the purchasing power of Slovak families, and we show to what extent the drop in purchasing power was offset by anti-inflationary measures and consequent economic adjustments. The direct impact of increased prices, thus, can be decomposed into three components: compensation by government measures, compensation by economic adjustments (in the form of an extra wage growth induced by the shock and an extra automatic valorisation of social benefits due to the shock) and the resulting net impact of the inflationary shock that the families need to adjust to. We assess the impact separately for 2022 and 2023, but we also look at the impact on the two-year horizon. Due to the delay in economic adjustments, two-year horizon is more suitable to assess the full effect of the inflationary shock.

Using the second perspective, we keep our emphasis on the two-year horizon, and we show how the purchasing power of Slovak families changed in total. Thus, we also include the changes that would have occurred without the existence of the inflationary shock (the effect of standard price increase, standard wage growth and standard indexation of social transfers as well as those government measures that are not directly related to the price shock). Total changes in purchasing power can be decomposed into the no-shock and shock component.

When assessing distributional effects, income dimension is the natural first choice. We present the effects on Slovak families according to their equivalized income (we categorize families²⁵ into ten income deciles). However, during the period of high inflation, Slovak government adopted measures that were targeted at particular population groups, such as families with children or pensioners, giving them generous support while leaving the rest unsupported. Therefore, we consider it useful to look at another dimension, besides income, too. We also present the effects on Slovak families according to family structure (we categorize “single” families and “couple” families according to the number of children they have).

4.1. Assessing the distributional impact of the inflationary shock by income deciles

4.1.1. Impact of the inflationary shock by income deciles in 2022

First, we look at the direct effect of increased prices in 2022, without considering government measures or consequent economic adjustments. We interpret this direct effect as an enforced increase in families’ expenditure, or in other words, as a drop in their purchasing power.

On average, a Slovak family faced an unexpected increase in its expenditure by 10% because of the price shock in 2022 (see Figure 7). If we look at families across income distribution, we see a regressive pattern. Families with the lowest income faced an increase in expenditure of 11%, while for families with the highest income the increase was 9%. In comparison to other European countries, the regressivity is less pronounced, one of the reasons being a modest rise of energy prices in 2022 in Slovakia compared to some other European countries, where the energy contracts for households already incorporated the increased prices throughout the year.²⁶

Figure 7

Download asset Open asset

Consequent economic adjustments helped families to compensate for the drop in their purchasing power. We assume that without the inflationary shock, wages would have grown at a slower pace in 2022. The extra growth in wages, the result of inflationary pressure, compensated for the increase in expenditure by 3 p.p. for an average Slovak family. This effect is regressive as it offsets the drop in purchasing power more for high-income families (4 p.p.) than for those with lower income (2 p.p.). In 2022 there is no effect of extra valorisation of social benefits, due to the delay in automatic indexation mechanisms. Therefore, the contribution of economic adjustments is solely through the wage channel.

To help Slovak families cope with increased prices in 2022, the government adopted targeted income measures. These measures helped mainly at the lower end of the income distribution,²⁷ compensating 5 p.p. of the drop in purchasing power for families with the lowest income. The offsetting effect of income measures to families with higher income was diminishing (0.2 p.p. for the tenth decile).

The final effect of the inflationary shock on family welfare in 2022 is the result of an interplay between a progressive effect of government income measures and a regressive effect of economic adjustments. The resulting U-shape across income distribution is due to the fact that for low-income families the effect of adopted government measures prevails, while for high-income families the effect of economic adjustment is stronger. Families with the lowest and highest income are facing a drop in their welfare of 4% and 5% respectively, whereas the families in the middle of the income distribution face a decrease in their welfare of 8-9%.

4.1.2. Impact of the inflationary shock by income deciles in 2023

In 2023, had the market prices of energy been left to fully affect regulated prices, a Slovak family would have faced an increase in its monthly expenditure on average by 17% prior to government measures and economic adjustments (see Figure 7).²⁸ As energy prices contribute positively to inflation inequality, it would have increased significantly in 2023. The difference in the inflation of low and high-income families would be 6 p.p. compared to just 2 p.p. in 2022. Families with the lowest income would have faced an increase in expenditure of 20%, while the purchasing power of the highest income families would have dropped by 14%.

However, families didn’t face such an increase in expenditures. Setting a price cap for energy contracts for households prevented an increase in expenditures by 10 p.p. on average. As low-income groups allocate higher budget shares to energy, we can see a progressive pattern in the effect of setting a price cap. The price cap helps the families with the lowest income to reduce the drop in purchasing power by 12 p.p. and the families with the highest income by 8 p.p. However, this measure is more expensive for families with higher incomes since in nominal terms they spend more on energy compared to low-income families (see Figure A1 in the Appendix).

In 2023, the economy reacted to the price shock via two channels: the wage channel and the valorisation channel. Thanks to the inflation-induced wage growth and the extra valorisation of social transfers, disposable income of families increased. It helped an average family to reduce the gap in expenditure by 8 p.p. The effect from the wage channel was regressive, helping the families in the first decile by less than 1 p.p. and the families in the tenth decile by 6 p.p. The effect of social transfers valorisation was progressive (5 p.p. for the 1^st decile, 2 p.p. for the 10^th decile).²⁹

In 2023 the government measures were targeted at pensioners mainly. Pension benefits increased thanks to the advance indexation of pensions and thanks to the one-off allowance of 300 euros paid at the end of the year. Thus, the effect of measures across the income distribution is driven by the occurrence of pensioners in individual income deciles (2^nd to 6^th).

For an average family, the cushioning effects of government measures and economic adjustments more than compensate for the drop in purchasing power in 2023. This holds true for all income categories. While for an average family the net effect is an increase in purchasing power of 5%, the lowest welfare gain of 1% is observed for families with the lowest income. This can be explained by income structure of the families in the first decile. Compared to other income deciles, the share of pensions in their income is much lower. Thus, these families benefit less from pension indexation that helped the families in the other income deciles.

4.1.3. Impact of the inflationary shock by income deciles on the two-year horizon

When assessing the years separately, purchasing power drops for an average family in 2022 and increases in 2023. This is mainly due to the delay in automatic valorisation and in wage adjustment. To assess the full effect of the inflationary shock, we consider the changes on the two-year horizon (see Figure 8).

Figure 8

Download asset Open asset

On the two-year horizon, an extra growth of prices led to a modest drop (by 1% or 6 euros monthly) in purchasing power for an average family. Thus, we can conclude that, on average, the combination of policy measures and economic adjustments were close to tackle the negative effects of the inflation surge. The income categories that were fully compensated are the categories which include pensioners.

4.1.4. Total change in purchasing power by income deciles on the two-year horizon

In the sections above we looked at welfare changes that were induced by the inflationary shock. However, the purchasing power of Slovak families would have changed even without the occurrence of the shock. This effect would have been determined by the interplay between the change in the prices of families’ consumption baskets and the change in their disposable income. Changes in disposable income would have been driven through the wage indexation and benefit valorisation.³⁰ On top of that, government measures that would have been adopted without the occurrence of the inflationary shock would have affected the disposable income too.

Keeping the emphasis on the full effect of the inflationary shock, Figure 9 offers a look at the changes in purchasing power on the two-year horizon in the hypothetical situation without the occurrence of the inflationary shock.³¹ In this case, price increases would have led to a drop in purchasing power of 5%. The economic adjustments would have compensated for this drop by 9 p.p. On top of that, government measures, that we consider unrelated to the inflationary shock, would have led to an increase in disposable income and would have strengthened purchasing power by another 6 p.p. As a result, an average Slovak family would have faced a net increase in purchasing power of 10% on the two-year horizon.

Figure 9

Download asset Open asset

When looking at the total effect, including the inflationary shock (see Figure 10), we see that it is the non-inflationary part that is driving the resulting positive change in purchasing power on the two-year horizon (on average by 9 p.p.). While the inflationary shock contributed modestly (on average by 1 p.p.) to a drop in purchasing power across the whole income distribution, in the no-shock scenario purchasing power increased considerably across the whole income distribution (on average by 10 p.p.).

Figure 10

Download asset Open asset

We show that Slovak families, on average, faced an increase in purchasing power on the two-year horizon. However, it isn’t true for all families. There are 14% of families that faced a drop in purchasing power and they are observed in each income category (see Figure A8 in the Appendix). To assess the variation in the total effect within categories we look at boxplots that display the distribution using five-number summary (see Figure A6 in the Appendix). The variation in the total welfare effect is significant within the income categories. The variation, when measured in nominal terms, increases with income. However, the fact that government policies were targeted at specific population groups plays a role as well. This is most obvious in case of the no-shock scenario. The highest variation is observed in 7^th-9^th income decile, which are the deciles with highest occurrence of families with children. Families in these deciles were supported if having children, while the generosity of the support increased with the number of children. On the other hand, families without children (apart from pensioners), might be left without any support.

4.2. Assessing the distributional impact of the inflationary shock by family types

4.2.1. Impact of the inflationary shock by family types in 2022

In the alternative view we look at the impact of the inflationary shock on Slovak families according to their family structure. We distinguish single and couple families according to the number of children they have.

When assessing the net effect of the inflationary shock, after the cushioning effects of government measures and economic adjustments, families in all analysed categories faced a drop in their purchasing power in 2022 (see Figure 11). The more children a family has, the stronger is the cushioning effect of government measures. This is a result of the fact that the anti-inflationary measures were disproportionally targeted at families with children. The share of all one-off payments allocated to the child benefit reached 75%, with families receiving a one-off benefit per each child. However, government measures along with economic adjustments were not sufficient to outweigh the effect of increased prices. As a result, families in all categories faced a drop in purchasing power, ranging from negative 4% (single parents with 3 and more children) to negative 7% (categories without children).

Figure 11

Download asset Open asset

4.2.2. Impact of the inflationary shock by family types in 2023

The increase of prices in 2023, without the cushioning effects of government measures and economic adjustment, would hit “single” families harder (17 – 18%) than “couple” families (14 – 17%). In 2023 the price cap significantly compensated for the drop in purchasing power. The shape of the resulting net welfare impact is determined mainly by the effect of valorisation. Beyond the extra valorisation of social benefits due to high inflation in the previous year, the government decided to index pension benefits in advance and to pay an extra pension at the end of the 2023. The categories “single without children” and “couple without children”, where the old-age pension recipients are included, face a net increase in purchasing power of 6% and 8% respectively. The effect for the other categories is closer to zero or below zero.

4.2.3. Impact of the inflationary shock by family types on the two-year horizon

To assess the full effect of the inflationary shock, we consider the changes on the two-year horizon (see Figure 12). We conclude that an extra growth of prices led to a modest drop in purchasing power for an average family (by 1 p.p.). The negative effect was more pronounced for families with children than for the singles or couples without children. As mentioned above, the reason being the generous valorisation of pension benefits. The category couples without the children is the only category facing welfare increase (by 3 p.p.) on the two-year horizon.

Figure 12

Download asset Open asset

4.2.4. Total change in purchasing power by family types on the two-year horizon

Shifting our focus on total changes in purchasing power on the two-year horizon, we start with a view on how it would look like if there was no inflationary shock (see Figure 13). Without the occurrence of the inflationary shock, families in all analysed categories would have faced an increase in welfare on the two-year horizon.³² Positive effect would strengthen with the number of children in a family, which is a consequence of an adopted government measure, which permanently raised the amount of the child tax credit and the child benefit for each dependent child.

Figure 13

Download asset Open asset

When looking at the total effect, including the inflationary shock (see Figure 14), we see that it is the non-inflationary part that is driving the resulting positive welfare change in on the two-year horizon for each of the analysed categories. As a result, each of the categories faced an increase in the purchasing power on the two-year horizon. The resulting effect is stronger as the number of children in the family increases, thanks to the generous family-oriented measures adopted by the government. While family units without children face an increase under 10%, family units with three or more children face an increase above 20%.

Figure 14

Download asset Open asset

As already mentioned above, an increase in purchasing power reported for an average family does not apply for all the families (see Figure A8 in the Appendix). The drop in purchasing power was most frequently faced by singles without children (23%). On the other hand, there are no families with three or more children facing a drop in purchasing power. Families with more children were protected from the drop as they received more generous support by the government. Even if using this categorisation, the variation in the size of the effect is still high (see Figure A7 in the Appendix). One of the reasons being the fact that only families with labour income are eligible for child tax credit, while at the same time the amount of the child tax credit is restricted by level of earnings of the family. Thus, e.g. a family with two children, depending on level of its earnings, might be eligible for any size of child tax credit between not being eligible at all to a full amount. Another source of variation relates to income structure as well. The higher the share of pensions in the income, the more the family benefits from governments measures targeted on pensioners.

We analyse the impact of an unexpected and steep increase in price level on the purchasing power of Slovak families in 2022 and 2023. The combination of a microsimulation tax and benefit model SIMTASK with the detailed data on consumption expenditure from the Household Budget Survey is used to quantify the net effect of exogenous inflationary shock after the cushioning effects of government measures and economic adjustments in the form of inflation-induced wage growth and an extra valorisation of social benefits.

We choose purchasing power as an indicator to analyse changes in the welfare of Slovak families. As data do not allow us to incorporate the effect of behavioural changes, we had to adopt a limiting assumption in our analysis. Thus, our results show how much more Slovak families would have to spend if they maintained the same amount and structure of consumption. Or in other words, how much their purchasing power dropped because of the inflationary shock. The resulting variation in the impact of the inflationary shock across categories of families analysed is due to different inflation rates resulting from different consumption baskets consumed by families.

The resulting net impact of inflationary shock depends on how the policies relevant to the inflationary shock are defined. We adopt a view that anti-inflationary measures are those measures that were declared by the government to help citizens cope with the increased costs of living due to the inflationary shock and have a transitory character. As opposed to the measures that would have been adopted anyway or have a permanent character.

According to our model, the purchasing power of Slovak families would have dropped by 10% in 2022 in the absence of cushioning effects of government measures and economic adjustments. We show that the government measures were well targeted and succeeded in offsetting a part of a purchasing power decline – mostly for low-income families. The relative impact for the bottom decile was almost 6 times larger than the average support, while the impact for the top decile was less than one third of the average support. For high-income families, economic adjustments were the component that helped to offset a significant part of their purchasing power decrease. However, the overall net effect on purchasing power was negative in every income decile. An average Slovak family, according to our estimate, faced an unexpected drop in purchasing power of 7% in 2022.

The story is different in 2023, when the increase in prices would have pushed up the expenditures by 17% for an average Slovak family. It turns out that despite high inflation, the compensating effects of macroeconomic adjustment, hand in hand with a generous price cap on energy prices and government measures, more than offset the decrease in purchasing power for an average family. The recipients of pension benefits are the part of the population that received the highest compensation. Thanks to the automatic indexation mechanism, high inflation from 2022 was transferred into significantly elevated 2023 pension benefits. On top of that, pensioners received an extra increase in pensions due to adopted government measures (earlier indexation of pension benefits and a one-off allowance of 300 euros). According to our estimates, the overall net effect on purchasing power for an average family is positive and reaches 5%. However, our results show that families with the lowest income faced the lowest welfare increase (1%), mainly because the share of pensions in their income is much lower compared to other income deciles.

When assessing the years separately, due to the delayed valorisation and wage adjustments, we observe a drop in purchasing power for an average family in 2022 and an increase in 2023. Looking at the two-year horizon, we can assess the full effect of the inflationary shock. We conclude that, on average, the compensatory effects almost fully mitigated the negative effect of price increases. As most of the anti-inflationary fiscal measures were targeted at pensioners, they are the only part of the population facing an increase in purchasing power when looking strictly at the effects related to the inflationary shock. In this view, families with lowest income and families with more children were the categories that, on average, faced the highest drop in purchasing power.

However, during the period of the inflationary shock Slovak government adopted generous measures permanently increasing family related benefits (child tax credit and child benefit), which we consider unrelated to the shock due to their permanent character. We take them into account when looking at total welfare changes over the two-year horizon. In this perspective we also include all the effects that would have occurred without the occurrence of the inflationary shock (standard wage increase, standard valorisation of benefits and government measures unrelated to the shock). We show that purchasing power would have increased significantly without the occurrence of the inflationary shock, thus driving the overall positive change at the two-year horizon. Compared to 2021, the purchasing power of an average Slovak family increased by 9% and we observe an increase in each of the categories analysed.

Our results suggest that if a family benefited neither from the generous family measures nor from the generously increased pension benefits, there is a higher probability that it was facing a welfare drop. The results, thus, indicate that the effect of fiscal measures adopted during the period of the inflationary shock, although voluminous, might not be distributed efficiently. The welfare increased significantly, even in the period of high inflation, for those families that were eligible for the generously increased benefits. On the other hand, among the families with highest probability of welfare loss are those with the lowest income and singles without children.

1. 1
   Fiscal Policy and Inequality: The Distributional Impact of Fiscal Measures to Compensate Consumer Inflation

   1. AF Amores
   2. HS Basso
   3. JS Bischl
   4. P Agostini
   5. S Poli
   6. E Dicarlo
   7. M Flevotomou
   8. M Freier
   9. S Maier
   10. E García-Miralles
   11. M Pidkuyko
   12. M Ricci
   13. S Riscado

   (2023)

   ECB Occasional Paper No.2023/330.

   • Google Scholar
2. 2
   Targeted, Implementable, and Practical Energy Relief Measures for Households in Europe

   1. N Arregui
   2. O Celasun
   3. DM Iakova
   4. A Mineshima
   5. V Mylonas
   6. FG Toscani
   7. Yc Wong
   8. L Zeng
   9. J Zhou

   (2022)

   IMF Working Papers 2022:1.

   https://doi.org/10.5089/9798400227400.001

   • Google Scholar
3. 3
   DYNAMIC SCORING OF TAX REFORMS IN THE EUROPEAN UNION

   1. S Barrios
   2. M Dolls
   3. A Maftei
   4. A Peichl
   5. S Riscado
   6. J Varga
   7. C Wittneben

   (2019)

   Journal of Policy Analysis and Management 38:239–262.

   https://doi.org/10.1002/pam.22105

   • Google Scholar
4. 4
   The Heterogeneous Impact of Inflation on Households’ Balance Sheets

   1. M Cardoso
   2. C Ferreira
   3. JM Leiva
   4. G Nuño
   5. Á Ortiz
   6. T Rodrigo
   7. S Vazquez

   (2022)

   Red Nacional de Investigadores En Economía (RedNIE), Working Papers 176.

   • Google Scholar
5. 5
   A cost of living squeeze? Distributional implications of rising inflation

   1. O Causa
   2. E Soldani
   3. S Luu
   4. C Soriolo

   (2022)

   OECD Economic Department, Working Papers No. 1744.

   • Google Scholar
6. 6
   Inflation inequality in the European Union and its drivers

   1. G Claeys
   2. L Guetta-Jeanrenaud
   3. C McCaffrey
   4. L Welslau

   (2022)
7. 7
   Does inflation hit the poor hardest everywhere? Bruegel Blog post

   1. G Claeys
   2. C McCaffrey
   3. L Welslau

   (2022)
8. 8
   The Redistributive Effects of Inflation: A Microsimulation Analysis for Italy

   1. N Curci
   2. M Savegnago
   3. G Zevi
   4. R Zizza

   (2022)

   In Review, 10.21203/rs.3.rs-2611447/v1.

   • Google Scholar
9. 9
   Guidelines for Constructing Consumption Aggregates for Welfare Analysis

   1. A Deaton
   2. S Zaidi

   (2002)

   135, Guidelines for Constructing Consumption Aggregates for Welfare Analysis, World Bank LSMS Working Paper, p, 10.1596/0-8213-4990-2.

   • Google Scholar
10. 10
    Inflation and Government Response – Distributional Impact on Austrian Households

    1. P Eckerstorfer
    2. M Riegler
    3. F Sindermann

    (2024)
11. 11
    The end of the flat tax experiment in Slovakia: An evaluation using behavioural microsimulation in a dynamic macroeconomic framework

    1. M Horváth
    2. M Senaj
    3. Z Siebertová
    4. N Švarda
    5. J Valachyová

    (2019)

    Economic Modelling 80:171–184.

    https://doi.org/10.1016/j.econmod.2018.11.005

    • Google Scholar
12. 12
    No, 130650, Joint Research Centre (JRC) Science for Policy European Commission, Ispra

    1. B Menyhert

    (2022)

    No, 130650, Joint Research Centre (JRC) Science for Policy European Commission, Ispra.

    • Google Scholar
13. 13
    Measuring Household Welfare Short Versus Long Consumption Modules

    1. M Moratti
    2. L Natali

    (2012)

    WP–2012, Measuring Household Welfare Short Versus Long Consumption Modules, UNICEF Office of Research Working Paper, p.

    • Google Scholar
14. 14
    Who Bears the Costs of Inflation? Euro Area Households and the 2021–2022 Shock

    1. F Pallotti
    2. G Paz-Pardo
    3. J Slacalek
    4. O Tristani
    5. G Violante

    (2023)

    SSRN Electronic Journal, Working Paper Series No 2877, 10.2139/ssrn.4645068.

    • Google Scholar
15. 15
    National Policies to Shield Consumers from Rising Energy Prices

    1. G Sgaravatti
    2. S Tagliapietra
    3. C Trasi
    4. G Zachmann

    (2021)
16. 16
    The fiscal side of Europe’s energy crisis: the facts, problems and prospects. Bruegel Blog post 02 March 2023 The fiscal side of Europe’s energy crisis: the facts, problems and prospects

    1. G Sgaravatti
    2. S Tagliapietra
    3. C Trasi

    (2023)
17. 17
    Improving the Validity of Microsimulation Results: Lessons from Slovakia

    1. Z Siebertova
    2. N Svarda
    3. J Valachyova

    (2016)

    International Journal of Microsimulation 9:77–105.

    https://doi.org/10.34196/ijm.00136

    • Google Scholar
18. 18
    Expenditure Imputation and Microsimulation of VAT

    1. Z Siebertová
    2. J Valachyová
    3. N Švarda
    4. M Senaj

    (2018)

    Council for Budget Responsibility, Discussion Paper No.1/2018.

    • Google Scholar
19. 19
    Welfare and Distributional Impact of Soaring Prices in Europe

    1. D Sologon
    2. C O’Donoghue
    3. J Linden
    4. I Kyzyma
    5. J Loughrey

    (2023)

    LISER, Working Paper Series, No 2023-04.

    • Google Scholar

Author details

1. Jana Valachyová

   Council for Budget Responsibility, Bratislava, Slovakia

   "This ORCID iD identifies the author of this article:" 0009-0000-5172-746X

2. Matúš Senaj

   Council for Budget Responsibility, Bratislava, Slovakia

   For correspondence

   matus.senaj@rrz.sk

   "This ORCID iD identifies the author of this article:" 0009-0005-2895-5188