Assessing a price shock impact on disposable income and its components after two years: a microsimulation approach

A price shock has delayed effects on disposable income due to three channels, regardless of its source. First, wages react, in line with the annual minimum wage increase and wage bargaining aiming at sustaining purchasing power. Then, some replacement incomes (pensions and unemployment benefits) as well as tax and benefit scales are legally or usually indexed on inflation on an annual basis. Finally, delayed effects are specific to the French tax and benefit system: the income tax is based on incomes earned a year before and some benefits are conditional on incomes earned two years before. The impact of a price shock on households purchasing power, up to two years after, is assessed using the microsimulation model Ines on representative data of the population living in France in 2015.
Two years after a 1 extra percentage point (pp.) inflation shock, the households real disposable income is lower by 0.3 % on average, than what it would have been without any price shock, under specific assumptions on income indexation and price dynamics. This purchasing power loss is mostly due to the decrease in real pre-redistribution income, accounting for – 0.5 pp. Taxes and social contributions slightly mitigate this drop in real disposable income, contributing + 0.1 pp. Benefits do not contribute to this loss. The higher the standard of living, the deeper the loss in purchasing power is: it decreases by 0.1 % for the 10 % poorest households whereas it drops by 0.6 % for the 10 % wealthiest households. Indeed, the higher the wage, the lower the indexation on inflation is. Besides, income composition matters: for low-income households, benefits and minimum wage are the main resources and are indexed on inflation; on the contrary, for high-income households, the main resources, such as wealth income or high wages, are hardly indexed on inflation, if at all. As a result, inequalities in living standards decrease only very slightly, compared to their level without any price shock (- 0.001 in Gini coefficient; - 0.4 % in decile ratio).