Can governments absorb the rise in commodity prices?

We illustrate our analysis with the cases of Germany, France, Spain, Italy and the euro zone as a whole. Rising commodity prices (energy, metals, food) are a consequence of the COVID crisis, the war in Ukraine and the energy transition. Without government support, and given the imperfect indexation of wages to prices, this rise in commodity prices will lead to a sharp fall in household purchasing power. Could governments avoid this by absorbing the rise in commodity prices themselves? At the various commodities’ current price levels, the cost for governments’ budgets, if they were to bear the entire rise in prices since the start of 2021, would be: 4.6 percentage points of GDP for Germany; 3.7 pp of GDP for France; 5.5 pp of GDP for Spain; 3.7 pp of GDP for Italy; 5.3 pp of GDP for the euro zone. This is beyond the capacity of these countries’ public finances.