A Regressive Shock? The Distributional Consequences of Middle East Conflict-Driven Inflation for German Households

Abstract

The escalation of the conflict in the Middle East in late February 2026 led to a sharp upward revision in inflation forecasts for Germany, which we attribute primarily to the conflict itself. Using microsimulation methods adapted to simulate a commodity price change, we translate this forecast revision into upper bounds on household-specific purchasing-power losses via a compensating variation approach, distinguishing the loss recovered through consumption taxes from the full loss including the pre-tax transfer to producers. Both measures are sizeable and regressive: in 2026, the average household loses 0.25% of income through the tax channel and 1.15% under the full measure, with bottom-decile losses of 0.63% and 2.87% against 0.12% and 0.65% for the top decile. The Gini coefficient rises by up to 0.14 points, and elderly households are disproportionately affected. Our results show that a supply-side shock originating outside Europe can have a sizeable and unequal impact on household living standards.