Inflation concerns and financial stress

Inflation rates in the euro area have risen significantly since 2020 and stayed elevated over several quarters. While it is well known that individuals adjust their consumption and savings behaviour as well as their inflation expectations when being exposed to rising price levels, much less is known about the psychological consequences of higher inflation rates. We hence conduct a representative survey in Germany in 2024 with around 1,800 participants to assess whether there is a link between inflation concerns and perceived financial stress that is not justified by fundamentals such as respondents’ financial constraints or income situation. Controlling for financial constraints and income, the main result is that higher inflation concerns relate in a positive and significant way to respondents’ reported levels of concerns about their current and future financial situation. The result remains robust in a subsample of financially unconstrained and high-income households and provides evidence for a psychological component of inflation concerns in a high inflationary environment.