Thursday, 20 Jan 2022

Euro crisis as inflation soars up to 10 percent – countries facing crippling price hikes

Investment expert on the high annual inflation rate

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Data this week showed inflation in Europe surged, with Germany’s hitting highest in decades. But the European Central Bank has maintained its “transitory” inflation stance. The ECB may set policy for a relatively short period at this month’s meeting given heightened uncertainty, President Christine Lagarde said.

In Germany, an inflation rate of more than 5 percent last caused a stir in November.

There are now euro countries in which prices rise quite differently.

And these are countries that fall under the monetary policy of the EU.

There is already speculation as to who will be the first to show a double-digit inflation rate.

This concerns the Baltic States: In Latvia the inflation rate in November was 7.4 percent, in Estonia 8.4 percent, and in Lithuania it was 9.3 percent.

Specifically, people in Lithuania complain, like here, that petrol has become so expensive, including heating oil and gas. But the price for milk in the supermarket has also increased by more than 30 percent, reports Petras Cepkauskas from the Lithuanian price comparison platform Pricer.

Virtually all food prices have risen. Wages also increased, but less so than prices.

Jan Körnert, economics professor in Greifswald who has dealt specifically with the Baltic countries, believes the large differences in inflation rates in the euro area could be “explosive”.

On December 16, the ECB will deal with how monetary policy should react to inflation.

However, the central bank governors of the Baltic countries have not yet been pushing particularly hard in the ECB Council that the central bank should tighten monetary policy.

Michael Schubert, ECB expert at Commerzbank said: “So far, the Balts have been relatively calm.”

Gediminas Šimkus, the head of the central bank of Lithuania, said: “As a small and very open economy, we have imported most of the current rise in inflation.”

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This was due to a “sudden increase in energy costs and considerable price pressure as a result of global imbalances between supply and demand in other markets”.

Estonian central bank chief Madis Müller made a similar statement. It was mainly about temporary effects, but one has to be careful.

Mārtiņš Kazāks, the head of the central bank of Latvia, said that the ECB ultimately had to shape monetary policy for the entire euro area, not for individual countries.

He is convinced, however, that the central bank will “take all necessary measures to achieve the monetary policy goal of an inflation rate of 2 percent in the medium term”.

The Institute for the World Economy (IfW) in Kiel has dealt with the reasons why the inflation rates in the Baltic countries are still significantly higher than in Germany, and came up with two groups of factors.

On the one hand, the starting position is different, says IfW expert Klaus-Jürgen Gern.

It was typical for countries that are growing strongly and still have a lower per capita income that inflation rates are higher.

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In the Baltic states, the growth rates are higher than in Germany, and at the same time unemployment is low. Wages and unit labour costs also rose faster than in Germany. That is why the countries had higher inflation rates even before the crisis. Rates between 3 and 5 percent are quite normal there.

On the other hand, prices in the Baltic countries reacted more quickly and more rapidly to the rise in raw material prices on world markets.

The increase in energy prices in the Baltic countries has recently been 25 to 30 percent, compared with around 18 percent in Germany. The reasons behind this are among other things: In Germany taxes and duties make up a larger share of the gasoline price.

That is why petrol is about 10 percent cheaper at petrol stations in the Baltic countries than here, but it reacts to any increase in the price of crude oil with a higher percentage increase.

This is making itself felt at the moment in view of the rise in oil prices since last year.

When it comes to the price of natural gas, on the other hand, the prices for consumers in the Baltic countries simply reacted more quickly to the world market price than in Germany – in Germany the price adjustment is sometimes delayed by long contract periods.

In this area, German consumers could still face price increases that the Baltic states have already seen.

This effect is reinforced by the fact that the spending on energy and food in the budgets of the people in the Baltic States make up a larger share than in Germany – and are therefore included with greater weight in the inflation rate, emphasises the Latvian bank economist Mārtiņš Āboliņš.

Overall, in the Baltic States, of course, as is the case here, the question is whether the rise in inflation is only “transitory”, i.e. temporary, as the ECB assumes, or whether it will last for a longer period of time, says Gern.

The ECB has also registered the abnormalities.

Countries with recently higher inflation, such as the Baltic states, are generally “smaller economies that are more sensitive to global energy price shocks, which leads to a stronger rise in domestic energy prices,” says the central bank.

In addition, in some cases these economies have progressed further in the rapid economic recovery phase after the pandemic shock this year, and therefore recorded stronger economic growth and higher wage increases, which may also have had an impact on general consumer price inflation: “In any case, it is expected that these economies, like the euro area, will experience a noticeable weakening of inflation in the course of 2022.”

Additional reporting by Monika Pallenberg

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