Each of us has his or her own inflation: is it really higher for pensioners?

But is it the case that the prices of goods and services that pensioners buy on a daily basis increase faster? If so, perhaps the indexation of old-age pensions should not use official inflation, calculated according to the “average consumption basket”, but employ “pensioners’ inflation” instead?  Otherwise, it may happen that the money added to the pension only partly compensates for the increase in the prices of products actually purchased by pensioners.

This article reveals "each person's own inflation" – for pensioners and young people, men and women, rich and poor – for the case of Latvia. We will use publicly available data to see how the structure of consumption by main product group (food, transport, utilities, etc.) varies across different population groups, as well as whether there is a relation between group-specific inflation and their perceived inflation revealed in public polls [2].

Women, pensioners and those with lower income perceive higher inflation

Public polls show that inflation perceptions vary substantially across different population groups. For example, older people are much more likely than younger people to feel that product prices have risen significantly. Women perceive inflation to be slightly higher than men. Also, people with lower income are more likely to point to a faster rise in consumer prices.

Such differences in price perceptions persisted also during the Covid-19 pandemic, with low-income people, women and pensioners being more likely to report a significant increase in consumer prices over the past 12 months and less likely to point to a consumer price decrease (Figure 1).

Figure 1. Perceived inflation by age group, gender and income level (balance of responses; Latvia)

Of course, each individual evaluates prices subjectively (it depends on what prices we look at and which exactly of the price increases we perceive as being "significant"). But perhaps there is also an objective reason for the perceived inflation differentials among population groups. Does the inflation of different population groups really differ significantly?

Which consumer basket – of young persons or pensioners – is like yours?

Each of us has his or her own consumption basket. The consumption basket of people of a similar age and gender and of those with a similar income level also tends to appear more similar. For example, pensioners spend a relatively large part of their budget on food, utilities and health care (Figure 2).

Figure 2. Consumption structure by socio-economic group, income level and age group of household (%; Latvia in 2019)

Young people spend more money on education, clothing and footwear, leisure and cultural activities, as well as restaurants and hotels. Men, in their turn, spend a relatively larger share of their budget on transport, alcoholic beverages and tobacco.

Low-income households spend half of their budget on food and utilities, while the wealthiest households spend on these items less than a third of their budget [3].

Show your consumption basket and we will calculate your inflation

Inflation differs significantly for different product groups. It cannot be said that a certain population group favours only those products whose prices are raising steeper or slower. For example, the product groups for which prices have risen the most over the last 20 years include both the products that dominate the consumption basket of pensioners (food, utilities and health care), and those that appear more frequently in youth consumption (education, restaurants and hotels; Figure 3).

Figure 3. Consumer price inflation of the main product groups (annually, in Latvia during 2002–2020 on average)

However, the inflation of various population groups really differs. Consumer price inflation is systematically higher for those who also have higher perceived inflation – pensioners, women and low-income households. For instance, the increase in prices for pensioner households since the beginning of the 2000s has been 22 percentage points higher than that for employed households (Figure 4).

Figure 4. Consumer price dynamics for pensioner and wage earner households (Latvia, over 2002–2020)

For the first quintile (low-income) households, the price increase was 17 percentage points higher than that for the fifth quintile (wealthier) households (Figure 5).

Figure 5. Consumer price dynamics for low-income and high-income households (Latvia, over 2002–2020)

Moreover, in households where the main breadwinner is a woman, the price increase was 4 percentage points higher than in those where the main breadwinner is a man.

Notes. As the structure of the consumption basket by household group was not available in 2017 and 2018, it was interpolated according to 2016 and 2019 data. Relevant data are not yet available for 2020 – the calculations assume that the structure of the consumer basket in all households will change in accordance with the changes in the weights of consumer prices in 2021.

Although the inflation gap between different age groups has been gradually narrowing since the global financial crisis, it widened again in the pandemic year. For example, inflation in pensioner households in 2020 was 0.6 percentage points higher than in households of wage earners. In low income households – by 0.5 percentage point higher than in wealthy households. Furthermore, in households where the main breadwinner is a woman, inflation was 0.4 percentage point higher than in those where the main breadwinner is a man.

Higher inflation for the most vulnerable as a welfare policy challenge

According to official data, the level of consumer prices in Latvia, calculated according to the average consumption basket of the Latvian population, has increased by an average of 3.5% annually since the beginning of the century. Our calculations show that this figure is half a percent higher for pensioner households (4.0%). In the consumption basket of pensioners, a significant share consists of food, utilities and health care services – product groups whose prices grew faster than the average inflation rate. Thus, pensioner inflation is systematically higher than official inflation of a representative consumer [4].

If the old-age pensions were indexed only to official inflation, it would not be able to fully compensate pensioners for the price increase of their consumption basket products. However, as the indexation of pensions also partly takes into account the average wage growth rate, the purchasing power of the average pension increases over time. At some point in the future, the average wage may not increase. Thus, different inflation for different population groups is a topic that should be taken into account in the welfare policy debate.

Now everyone has the opportunity to calculate their own inflation using the new personal inflation calculator from the European Central Bank.

References

[1] Even in times of rising prices, you can always find a product whose price has dropped (and opposite). For example, at the beginning of the Covid-19 pandemic, the price of buckwheat rose and the price of fuel fell.

[2] However, we will not be able to see their favourite type of cheese. In addition, it should be noted that data on the consumption structure are compiled by households and not by individuals. Thus, we can see how the consumption structure varies in different households, but we do not know exactly what a pensioner and a young person eat at breakfast if they live in the same household.

[3] Not to be confused with the amount of spending in euro terms – rich households spend more money on food.

[4] Since the turn of the century, pensioner inflation has been only twice lower than official inflation – in 2014 and 2018.