Energy prices in the euro area have receded from their peaks of last year, yet prices of other goods and services continue to rise. Headline inflation is declining, but core inflation remains stubbornly high. Fiscal policy has an important role to play in aligning with monetary policy to bring inflation back down to target.
The recent inflation episode has hurt low-income households the most, since they typically spend a larger share of their income on energy. Support measures put in place in many countries have mitigated this effect but have not ironed it out. Furthermore, poorer households’ incomes have increased by less than those of richer households in many countries over the past three years.
This inequality creates vulnerabilities that can aggravate recessions, reinforcing the need to build resiliency through larger fiscal buffers. Fiscal consolidation – as agreed by euro area governments and recommended by European institutions – helps create resilience for the future and avoid procyclical tightening. Near-term consolidation efforts need to be mindful of the increased inequality and avoid overburdening already struggling households. (...)
The recent inflation episode has hurt low-income households the most, since they typically spend a larger share of their income on energy. Support measures put in place in many countries have mitigated this effect but have not ironed it out. Furthermore, poorer households’ incomes have increased by less than those of richer households in many countries over the past three years.
This inequality creates vulnerabilities that can aggravate recessions, reinforcing the need to build resiliency through larger fiscal buffers. Fiscal consolidation – as agreed by euro area governments and recommended by European institutions – helps create resilience for the future and avoid procyclical tightening. Near-term consolidation efforts need to be mindful of the increased inequality and avoid overburdening already struggling households. (...)
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