How inflation affects households differently

Average basket of goods and services

In recent years, the Netherlands has experienced exceptionally high inflation, even reaching 17.1% in September 2022. Inflation is currently still above the 2% target rate.

To calculate inflation, we use the 'Harmonised Index of Consumer Prices' (HICP). This index measures the average change in the price of a basket of specific goods and services as purchased by households in the Netherlands. The inflation rate is then calculated as the percentage by which the total cost of this basket has increased from a year earlier. Based on these and other figures, Eurosystem central banks, including DNB, then determine what monetary policy decisions are needed to keep inflation at the 2% target.

Each household is different

This inflation rate reflects the price increases of an average basket of goods and services. It does not take into account differences between households. In practice, these differences do exist: households buy different products and services. Lower-income households often spend a higher proportion of their income on fixed expenses such as rent and energy bills. In contrast, higher-income households spend a greater proportion on more luxurious goods and services, such as travel and nights out.

A study (in Dutch) by the CPB Netherlands Bureau for Economic Policy Analysis found that the total fixed and necessary expenses of most households increased between 2019 and 2023. Incomes rose faster during the same period, however. Consequently, households are spending an increasingly smaller proportion of their income on fixed and necessary expenses.

Different expenses

The figure below shows the different spending patterns of various income groups. For instance, the 20% of households with the lowest income (the first quintile) spend more than a third of their income on housing costs, while this figure is less than a quarter for the 20% of household with the highest income (the fifth quintile).

There may also be differences in what households buy in certain product categories, for example cheaper private labels rather than name brands. The price increases of these products may vary but inflation rates do not capture these kinds of effects, as they are based on averages.

Research by the European Central Bank shows that between 2014 and 2018, low-income households in the Netherlands saw the prices of their daily shopping rise faster than more prosperous households. Also, not all households go to the same supermarkets and shops. They have different energy suppliers and internet providers. Some households spend more time than others comparison shopping to find the cheapest option. Households therefore sometimes pay a different price for the same product, meaning they experience inflation differently. 

Differences apparent

In early 2021, the difference in inflation between low and high incomes based on the HICP index was relatively narrow, as shown in the figure below. But when inflation surged later that year, differences suddenly became apparent. In early 2022, prices rose faster for products and services that higher-income households spend more on such as cars, furniture and clothes.

Later that year, the tide turned: the most pronounced price increases hit the very goods and services on which lower-income households spend proportionately more such as energy and, to a lesser extent, food.

Energy bill

Household energy bills in recent years have made the difference in the impact of higher prices clear. Higher energy costs take a bigger bite out of households' disposable income. This effect took hold with some delay as long-term energy contracts expired. Nevertheless, the share of disposable income spent on energy by the 20% of households with the lowest income rose from an average of 6% in 2020 to 7% in 2023. Higher-income households also saw an increase, but to a lesser extent, as shown in the figure below

Tobacco excise duty

Back to differences in inflation. We see that over the whole of 2022, the inflation rates for both groups still came out about the same, which incidentally does not mean that the impact on the financial situation of households was the same across the board.

Inflation differentials between high- and low-income households narrowed in 2023 and 2024, but in recent months we have seen a renewed inflation differential between the two groups. In this case, the difference stems from an increase in tobacco excise duty. These indirect taxes affect prices.

Tobacco falls in the food category when calculating the inflation rate. As food makes up a larger share of low-income households’ spending, the tobacco duty results in higher inflation for lower-income households than for their higher earning peers. Once again, this demonstrates that average inflation rates do not tell the whole story when it comes to the impact on individual households. After all, if you don't use tobacco products, you won't be affected by this tax hike.

Choices not everyone can make

The decisions that households make, and their ability to adjust their consumption in response to higher prices, have a significant impact on how they are affected by inflation. Households with higher incomes have more options for switching from more expensive products to cheaper alternatives when prices rise, for example by swapping name brands for private labels. They can also exercise more restraint when it comes to spending on luxury items.

Lower-income households have less scope to make such adjustments. They spend a larger share of their monthly budget on essential items such as housing costs, energy and food, and have fewer opportunities to change their spending habits. This is one of the reasons why rising prices affect households differently, leading to a different perception of inflation.

Stress from higher prices

In an opinion poll conducted by DNB, almost one in three households in the lowest income group said they experienced stress because of higher prices, compared with only one in seven for the highest-income group. Besides differences in households’ spending patterns and their ability to adjust them, their financial resilience is another factor in the mix. The smaller a household’s financial buffers, the harder inflation hits and the greater the uncertainty as to whether all bills can be paid. Although Dutch households’ savings have grown substantially in recent years, more than a quarter of Dutch people have less than €2,500 in savings, as revealed in a report (in Dutch) published by the National Institute for Family Finance Information (Nibud). One in eight has no savings at all, according to a study (in Dutch) by the CPB Netherlands Bureau for Economic Policy Analysis.

Partly because of this, it is difficult for some households to absorb shocks such as from high inflation.

Inflation is more than a percentage

Inflation affects us all, but not everyone equally. Percentages are only part of the picture. Households’ spending habits and their ability to absorb shocks are just as important. In addition to the differences observed between higher- and lower-income households, studies by the ECB and the CPB demonstrate that the effects of inflation can vary even within income groups, for example due to differences in consumption patterns, age and place of residence.

Moreover, the differences do not remain constant over time, having become more pronounced during the energy crisis, for instance. Behind average inflation rates lie individual narratives of financial resilience and economic reality – and these are as important as the inflation rate itself.