Inflation means there is less to buy for the same money. In recent decades, inflation in Europe has mostly been around one or two percent and has consequently been perceived as a kind of background noise. In the first Corona year, 2020, the European Central Bank (ECB) was still concerned that inflation could fall short of its target of around two percent in the long term.
But this year millions of Europeans are experiencing, for the first time in their lives, that the purchasing power of money can also dwindle rapidly. This puts the central bank under massive pressure. In the meantime, prices in the euro zone are rising more than four times as fast as the ECB inflation target envisages, and there is no sign of relaxation. The voices are getting louder that the institution is finally taking action.
Unlike other central banks, the ECB has not yet increased the key interest rate this year, the key rate remains at zero. An initial tentative hike of 25 basis points (i.e. 0.25 percentage points) has been announced for the monetary watchdog meeting on Thursday.
However, more and more observers now believe that one small step is not enough. Last week the euro fell to its lowest level since 2002 on the currency markets. For a while, the euro traded for less than a dollar. The single currency had even fallen to an all-time low against the Swiss franc.
The Reuters news agency reports that the ECB is now apparently also discussing a larger rate hike. A 50 basis point hike could be on the agenda at Thursday’s meeting, according to those familiar with the matter. In response to the reports, the European currency appreciated significantly. On Tuesday afternoon up to 1.0268 dollars were paid for one euro.
In June, ECB President Christine Lagarde promised an increase of a quarter of a percentage point, despite the generally strong inflation trend, supplemented by the hint that the key interest rate could rise by another half a percentage point after the summer break in September.
Reason: The rising prices are primarily due to disruptions on the supply side, i.e. shortages of goods and interruptions in deliveries, against which the monetary authorities can do nothing.
However, the figures now presented by the European statistics authority Eurostat make it clear how deeply the currency devaluation has eaten into the system. Compared to the previous year, prices in the entire euro area rose by 8.6 percent in June, and the inflation rate in the EU was 9.6 percent.
In no fewer than 15 of the 27 EU countries, inflation was ten percent or more in June. The Baltic states, which often had close trade ties with Russia prior to Russia’s war of aggression in Ukraine, and now get their energy elsewhere, experienced the highest inflation. Lithuania and Estonia reported price increases of more than 20 percent, in Latvia prices climbed by 19 percent.
But also in Croatia, Hungary, Poland, the Czech Republic, Bulgaria, Romania and other countries in Central and Eastern Europe, the citizens are confronted with living costs that are between twelve and 17 percent higher than a year ago. The price increases there are sometimes twice as high as in Germany. In Germany, according to Eurostat measurements, prices rose by 8.2 percent in June.
The value may confuse some, after all, the Federal Statistical Office had reported an inflation rate of 7.6 percent for June. The discrepancy results from the fact that Eurostat uses a different composition of the “shopping basket” than the statisticians in Wiesbaden to determine the price increase.
Whatever definition is used, German inflation in June was the fourth lowest in the European Union. Only the small state of Malta (6.1 percent), France (6.5 percent) and Finland (8.1 percent) recorded lower rates.
However, the Wiesbaden statisticians note that German inflation was artificially depressed by the tank discount and the nine-euro ticket in the summer. The Federal Republic is not the only country whose data gives an embellished picture of the situation.
In France, government caps on energy prices have prevented inflation from escalating. The real inflation miracle in Europe, however, is Switzerland, where goods and services rose by only 3.2 percent over the year.
Hopes that the wave of inflation is about to peak have been dashed for the time being with the Eurostat data for June. Compared to May, inflation fell in only two Member States, while 25 reported increases. In terms of product categories, it’s easy to identify what’s driving inflation: Europe’s energy prices are up 42 percent year-on-year.
Natural gas, petrol, diesel, heating oil and electricity were the main drivers. But groceries also cost a lot more than they did twelve months ago: including alcohol and tobacco, prices rose by 8.9 percent, while services only rose by 3.4 percent.
Figures from the European real estate markets up to March, which the war has not yet had a major impact on, show that it is not just rising consumer prices that are causing the central bank headaches.
According to this, houses and apartments have become more expensive by around ten percent on average over the year: by 9.8 percent in the euro zone and by 10.5 percent in the EU. The price increases were highest in the Czech Republic at 26 percent compared to the previous year, followed by Hungary at 23 percent.
In the euro country Lithuania it went up by 20 percent. Observers attribute this not least to the greatly expanded money supply. And so the central bank is in demand again, which strongly influences the money supply via the key interest rate and other instruments.
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