As price growth in the EU is gaining momentum, inflationary scissors are opening up between countries

The euro area, or rather the European Union, faced such high inflation for the last time ten years ago. However, the European Central Bank remains calm for the time being.

The inflation rate in the European Union reached a year-on-year level of 3.2 percent in August, and three percent in the euro area. Compared to July, this is an increase of 0.7, respectively 0.8 percentage points.[1] The euro area, or rather the European Union, faced such high inflation for the last time ten years ago. However, the European Central Bank remains calm for the time being.

 

High inflation is a global phenomenon. The United States began to grapple with high inflation in the spring, but since then the extraordinarily rapid rise in prices has spread to Europe. The coronavirus epidemic was thus gradually replaced by an inflationary epidemic. However, the individual countries of the European Union experience inflation differently. This may be a particular problem at the level of the euro area, which is subject to the single monetary policy of the European Central Bank.

 

It is still true that the lowest rate of price growth mainly concerns the southern countries. Prices grew the slowest in Malta (by 0.4 percent), Greece (1.2) and Portugal (1.3). In July, the order was almost the same, with the difference that Italy had the third lowest inflation, which reached 2.5 percent in August.

 

The opposite end of the ranking is dominated by the trio of Poland, Lithuania and Estonia, where all these countries have the same inflation rate of five (5) percent. Romania, Belgium and Hungary then experience inflation starting at four (4) percent. Among the three countries with the highest inflation, two use the euro as their currency, and the three countries with the lowest inflation also use the EUR.

 

What can be the causes of such a different price development? As a first explanation, a different course of the economic cycle is offered. In such a case, countries with very high GDP growth should also be among the ones with the highest inflation. This statement works in the case of Belgium, Hungary, Poland and Romania, whose economic growth was double-digit in the second quarter of this year.[2]

 

However, high inflation in Lithuania or Estonia, where the economy grew more slowly, can no longer be explained in this way. Nor can we explain through economic growth the low inflation in Portugal, where GDP rose by more than 15 percent year-on-year from April to June.

 

Another indicator is the development of the labour market. In general, in countries where the unemployment rate is reaching unnaturally low levels, inflationary pressures are escalating and vice versa. Unemployment in both the European Union and the euro area is falling to

pre-coronavirus levels. Year-on-year, the unemployment rate in the EU is 0.7 percentage points lower and in the euro area 0.8 percentage points lower than a year ago.[3]

 

If we look at individual countries, then we see a significant decline in unemployment both in countries with high inflation and also in countries where they enjoy relative price stability.

 

Differences in the rate of inflation are thus, to some extent, a sign of prevailing economic specifics in each member country. Temporary isolation and trade barriers during the lock-down times might have been a factor in the opening the inflationary scissors.

 

In the coming months, inflation can be expected to stagnate. After all, the year-on-year result in August was largely influenced by last year's low base effect, when the economy was recovering from the covid shock and prices tended to go downwards, also due to relatively weak demand. Signs of economic recovery were already present in the third and fourth quarters of last year, and this spring the lockdown in several countries and sectors began to materialize, leading to a shortage of important energy and industrial commodities. However, the imbalance between supply and demand should gradually narrow and inflation could start to normalize as early as at the beginning of next year if current trends persist.[4]

 

Tony Christoforou General Manager Goldenburg Group Ltd.

 

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Disclaimer: The content of this material constitutes Marketing Communication and does not constitute Investment Advice or Investment Research or an offer for any transactions in financial instrument. The content of the material represents the view of our experts on a generic basis, and does not take into consideration individual readers personal circumstances, investment experience or current financial situation. In addition, the material has not been prepared in accordance with legal requirements designed to promote the independence of Investment Research, and is not subject to any prohibition on dealing ahead of the dissemination of Investment Research. Readers using the material should consider the possibility of encountering substantial losses. The past performance is not a guarantee of future results. Therefore, Goldenburg Group Limited, its relevant persons including affiliates, agents, directors or employees do not guarantee the accuracy, validity, timeliness or completeness of any information/data made available and assume no liability for any loss of traders arising from any investment made based on the said information/data and due to the use and the content of this material.

 

 

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[1] All the inflation related data come from: https://ec.europa.eu/eurostat/documents/2995521/11563239/2-18082021-AP-EN.pdf/4488fc81-7b31-d682-2087-b7e597c07416?t=1629276661823

[2] All the GDP related data come from: https://ec.europa.eu/eurostat/documents/2995521/11563231/2-17082021-AP-EN.pdf/f70fe6cf-1859-c3ec-27f9-b5da6c6fc07a?t=1629187332055

[3] All the unemployment related data come from: https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Unemploymentstatistics#UnemploymentintheEUandtheeuroarea

[4] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or based on the current economic environment which is subject to change. Such statements are not guaranteeing of future performance. They involve risks and other uncertainties which are difficult to predict. Results could differ materially from those expressed or implied in any forward-looking statements.

Disclaimer: The content of the Reports constitutes Marketing Communication and does not constitute Investment Advice or Investment Research or an offer for any transactions in financial instrument. The content of the Reports represents the view of our experts on a generic basis, and does not take into consideration individual readers personal circumstances, investment experience or current financial situation. In addition, the Reports have not been prepared in accordance with legal requirements designed to promote the independence of Investment Research, and are not subject to any prohibition on dealing ahead of the dissemination of Investment Research. Readers using the Reports should consider the possibility of encountering substantial losses. The past performance is not a guarantee of future results. Therefore, Goldenburg Group Limited shall not accept any responsibility for any losses of traders due to the use and the content of its Reports.