European Union: More than 20 percent inflation
Riga A pack of Barilla noodles, 500 grams, can cost just over four euros in Latvia’s capital Riga, depending on the supermarket. A liter of whole milk is available for EUR 1.80, a packet of butter for EUR 2.40. The prices are as high as in Germany, sometimes even higher. And this despite the fact that the average salaries are far below.
Slow inflation rates within the euro zone will fall though again. But in the Baltic States Estonia, Latvia and Lithuania the rise in prices is meanwhile affecting the economic substance of many people. Also in Poland and Hungary people are groaning more and more under the massive increase in the cost of living.
Last autumn it became clear that more and more Estonians are using their savings to inflation to balance. In Latvia, private households went deeper into debt in order to still be able to pay their everyday bills. Consumers also took out significantly more credit in Lithuania, where food prices rose by 36 percent in 2022.
The Baltic States have particularly high inflation rates. The causes: Energy and food costs, which are considered to be the main drivers of inflation, generally account for a larger proportion of spending. In addition, daily energy purchases on the spot market played their part in the past year, while many companies in the rest of the EU opted for longer-term contracts.
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In the case of comparatively lower incomes, inflation is particularly important. In Latvia, for example, according to calculations by the Organization for Economic Co-operation and Development, the net disposable income per capita is (OECD) $19,783 per year – far less than the average for the industrialized countries represented in the OECD ($30,490). Consumer prices in the country have been rising continuously since the beginning of last year.
23.1 percent: Hungary has the highest inflation in Europe
But the inflation rate is not only high there (21.7 percent last November): according to current Eurostat data, the rate in Estonia and Lithuania was 21.4. The list is now led by Hungary with 23.1 percent, followed by the Czech Republic and Poland in fifth and sixth place with 16.1 and 15.1 percent. At 11.3 percent, Germany is in the middle, while Spain, France and Malta are at the lower end with almost seven percent.
Experts consider the wide range of inflation developments in the individual EU member states to be problematic. A team from the Kiel Institute for the World Economy, for example, writes that inflation in the euro area accelerated to a “historic level” in 2022, with the spread of inflation between the member states having “increased sharply”.
According to the researchers, this could lead to an “undesirable divergence in growth paths”. Moreover, if the differences are “significant and persistent”, the development could affect the “smooth functioning of monetary union”.
High inflation harbors the risk of uncontrollable price and wage dynamics, while low inflation rates endanger public finances and possibly weaken the economy.
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The former is currently worrying the Baltic States in particular, and they see the European Central Bank (ECB) in duty. For example, Latvia’s central bank governor, Martins Kazaks, recently said that a brief recession is expected, but not enough to stem price increases.
“Turning point slowly reached”
Kasaks is demanding a stricter monetary policy from the currency watchdogs. “Interest rates would have to be raised much more in order to reach the medium-term inflation target of two percent.” ECBboss Christine Lagarde judges. Lithuania’s President Gitanas Nauseda also recently complained that his country had no instruments to fight inflation. In Lithuania, a third of the population recently stated that they could no longer put any money aside.
Katharina Koenz, economist at the Oxford Economics think tank, points out that economically stronger states generally have more leeway to counteract inflation. “The larger states in the euro zone simply intervened more strongly,” such as Germany and France. In the Baltic States, on the other hand, the size of the fiscal packages is significantly smaller.
In Hungary and Poland, which do not belong to the euro zone, the national central banks have greater leeway. CommerzbankAnalyst Tatha Ghose sees peak in Hungary.
Economist Koenz sees the large discrepancy between the countries “of course not an ideal situation”. Nevertheless, she is cautiously optimistic: “It seems as if the turning point has slowly been reached.” Oil and gas prices are already improving on the world market compared to the peak values in the summer.
According to their calculations, inflation should “reduce noticeably” from the second half of the year, which means that the gap should “narrow significantly”. By 2024, Latvia and Lithuania should then be back within the ECB framework, Estonia “by 2025 at the latest”.
For many private households, however, this is currently little comfort, and only a few in the Baltic States believe in a quick improvement. Latvia’s central bank governor Kazaks, for example, recently told the Financial Times that he believes the rise in inflation in the euro zone is “not a temporary shock”. Rather, it is “a permanent change that requires structural solutions” – including an ambitious EU energy strategy.
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