Lower-income households spend a higher proportion of their income on energy. When energy costs rise, as has been the case in recent years, they are therefore hit harder than higher-income households. To help these households, targeted government support is more effective than generic compensation for increased costs. This was revealed in a new study conducted by De Nederlandsche Bank (DNB).
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Inflation is measured by looking at the price increases of an average basket of goods and services. One such basket is used to measure the consumer price index (CPI). In recent years, the prices of almost all products in that basket have gone up, and energy prices in particular have risen sharply. At its peak in 2022, year-on-year CPI inflation had risen to 10%, and almost half of that rise was due to increased energy prices. By 2024, overall inflation had fallen back again to 3.3%. However, this does not mean that every household was impacted by inflation to the same degree, since the basket of products can differ between households. Some households spend much of their income on groceries or housing costs, while others spend relatively more on clothes or holidays.
Energy costs are a clear example. A DNB Analysis shows that lower-income households spend a higher proportion of their income on energy compared to higher-income households. Energy prices rose particularly sharply in 2022, due to the Russian invasion of Ukraine. This energy crisis highlighted what differences in spending can mean for household-level inflation. The share of disposable income spent on energy – also known as the energy share – in 2022 was 6% for low-income households compared to 2% for high-income households. This discrepancy was even more pronounced for households that had to renew their energy contract in 2022. By 2023, more and more people had to take out new contracts at higher prices. As a result, the energy share rose even further in 2023 – to 7% for low-income households compared to 2% for high-income households.
There are also differences within income groups, for example between tenants and homeowners. In 2022, low-income homeowners spent on average 9% of their income on energy, while low-income tenants in social housing spent on average 6%, and low-income tenants in private rented housing 8%. Differences between higher-income households were less pronounced. Both high-income homeowners and high-income tenants spent about 2% of their income on energy in 2022. Another factor is that high-income households have reduced their gas consumption to a greater extent, for example by installing solar panels or switching to electric heating. By 2022, almost half of the highest-income households had solar panels, compared with 13% of the lowest-income households.
Central banks in the Eurosystem aim for a low and stable inflation of around 2%. When prices are likely to rise too sharply, the ECB raises interest rates to cool the economy and bring down inflation.
It takes time for such interest rate increases to have an effect on inflation. In addition, excessive increases could unnecessarily damage the economy. As confirmed in its recent monetary strategy review, the ECB therefore focuses on the medium term. Limited and temporary deviations from the inflation target need not be problematic, as long as inflation is expected to gradually return to 2% in good time.
Spiking inflation rates due to rising energy prices are difficult to combat in the short term with monetary policy. In such situations, the government might decide to take steps to reduce the impact on households. In our role as economic adviser, we analyse the design of such support measures to assess their impact on public finances and inflation. If higher energy prices lead to overall higher inflation levels, as happened for instance after Russia's invasion of Ukraine, the ECB may decide to raise interest rates to curb inflation.
To cushion the most acute impact of energy inflation, the Dutch government took measures to support households during the energy crisis. These compensatory measures prevented households from suffering significant financial setbacks. Without these measures, the loss of purchasing power would have been 7% on average, and as much as 21% for the lowest-income households. Income and price measures helped to reduce this to 6% on average, and 12% for the lowest-income households. These figures may differ from the figures presented by the Netherlands Bureau for Economic Policy Analysis (CPB) and Statistics Netherlands (CBS), because we use a different definition of purchasing power. See our DNB Analysis for more information.
To cushion the impact of energy inflation as effectively as possible, the focus was on supporting households that were most affected by the high energy prices. The lowest-income households received a €1,300 energy allowance, which had a major impact. It was granted to households with incomes up to 120% of the social minimum and specifically targeted households for which energy inflation was causing the most acute problems. The costs of this measure were €1.4 billion. Thanks to this allowance, the average purchasing power loss was reduced by 0.2 percentage points. For the lowest-income households, the reduction in loss amounted to 5 percentage points.
In addition, all households received an energy compensation amount of €380, which was distributed through the energy providers. The costs of this measure were €3.2 billion, and this reduced the average purchasing power loss by 0.7 percentage points, and by 2 percentage points for the lowest-income households. This shows that targeted income support is more effective in cushioning the impact of energy inflation on lower-income households. At the same time, more targeted support ensures that the impact on inflation is limited, as overall additional government spending is less.
The government also took price measures in 2022, such as reducing VAT on gas and electricity and excise duties on petrol, diesel and LPG. Our analysis shows that these measures were less effective, and reduced the loss of purchasing power by no more than 1 percentage point on average. For low-income households, this was 2 percentage points and for high-income households 0.5 percentage points. As low-income households spend relatively more of their income on energy, they benefit relatively more from support measures.
Although energy prices have stabilised in the meantime, in 2024 they were almost twice as high as in 2019. Oil prices have also gone up again recently due to the turmoil in the Middle East. This could affect both fuel and gas prices.
If energy costs remain high for longer, it makes sense to take measures to reduce household energy consumption in addition to introducing compensation schemes. This not only reduces energy bills, but also makes households less vulnerable to fluctuations in energy prices.
DNB Analyse - Energie-inflatie: De impact van de energiecrisis op huishoudens (Only in Dutch)
06 June 2025
Press release
The Dutch economy is set to grow by 1.1% in 2025. Uncertainty and trade tensions will continue to mute economic growth at around 1% a year for the following two years. This is according to the Spring Projections as published by De Nederlandsche Bank (DNB) on Friday.
Read more Uncertainty and trade tensions weigh on economic growth
11 March 2025
Background
While inflation in the euro area is heading towards the 2% target over the course of this year, inflation in the Netherlands remains persistently higher than expected. In our new analysis, we show that the impact on inflation varies for each policy measure and depends on the state of the economy.
Read more The impact of government policies on inflation
14 February 2025
Speech
‘What we need now is for governments, central banks and academia to continue to speak out for the international financial rules-based order that has brought us stability and prosperity over the decades.’, said Klaas Knot at Nyenrode Business University today.
Read more The case for international monetary diplomacy
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DNB in the media
On 7 November, Klaas Knot was a guest at Room for Discussion, the interview programme of students from the University of Amsterdam. How does Knot experience the challenges in the field of monetary policy? How do you balance economic growth, financial stability and the fight against inflation?
Read more Klaas Knot at Room for Discussion (studentsUvA)