ROME. European households draw on their savings “to cushion the impact that higher energy prices have on consumption”. The ECB writes in anticipation of the economic bulletin on energy prices and consumption. The central bank experts explain: «The empirical evidence confirms that, at least in the short term, households are reducing their savings ratios to cope with the increase in energy spending. With the same absolute increase in energy expenditure, the reduction in savings is inversely related to household income and about five or six times greater for families in the lowest quintile of the relative income distribution than those in the upper quintile ». Conversely, higher-income households make fewer adjustments to spending on essential goods, as energy-sensitive spending accounts for a smaller percentage of their income. In general, the report continues, “when spending on energy increases, families reduce their purchases of essential goods and services to a small extent”.
Since the beginning of 2021, “the positive shocks in demand have led to a recovery in financial conditions, consumption and savings expected by families”. However, “the increase in commodity prices observed since the summer of 2021 has increasingly been seen as a suffocation of the expected financial situation of families, thus weighing on their spending plans”.
The increase in energy prices “has significant implications, which require targeted fiscal policy measures”, continues the report “Energy prices and private consumption: what are the channels?”. “The impact that energy prices have on household income and spending – says the study – mainly depends on the level of household exposure: low-income households with high levels of exposure tend to suffer significant financial difficulties when spending energy increases unexpectedly and respond to these shocks by reducing savings or delaying payments ». As a result, “such households are more likely to feel that governments need to mitigate the negative impact of rising energy prices.”