Inflation at its highest in Europe, reasons and consequences

REUTERS / Charles Platiau

Text by: Agnieszka Kumor

4 min

For several months, inflation has been breaking records: 6.2% in the United States, 4.9% in the euro zone.

It's unheard of for twenty years.

The figures are panicking in the Baltic countries, Belgium, Spain, the Netherlands and even Germany, the largest European economy.

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The rise in prices is widespread, we can see it every day whether at the supermarket or at the gas station.

Energy, in particular electricity and gas, is the first to experience the greatest increase: 27.4%.

Next come services, industrial goods, food, alcohol and tobacco.

What is the reason for this inflationary surge?

And above all, does it threaten the way out of the crisis?

Demand is exploding

Paradoxically, it was the rebound in household consumption and the economic recovery that arrived quickly after the health crisis that caused demand to explode.

Bottlenecks formed causing supply problems.

And the offer no longer follows, notes Eric Delannoy, chairman of the Tenzing consulting firm:

“With the investment picking up again, it takes time for production capacities to adjust to demand which has become very strong. It's the same with logistics circuits that have been paralyzed for a year and a half, which is reflected in particular by Renault's inability, for example, to build vehicles because it lacks semiconductors. We must put in place the logistics circuits, the circuits of globalization to ensure that we can replenish food chains, then sell. It could take between six months and a year. "

Another problem that prevents supply and demand from adjusting: massive stimulus plans,

the Biden plan in the United States

or the European stimulus plan which have injected significant liquidity into the markets.

Temporary or lasting?

Is there a risk of this situation occurring over time?

In the United States, where the stimulus plan is gigantic and where very expensive budgetary measures were put in place during the pandemic in favor of American households, inflationary pressures could persist.

As far as the euro zone is concerned, it is a little different.

Charles Wyplosz, honorary professor at the Graduate Institute of International and Development Studies (IHEID) in Geneva, specifies: “

For a year now, there has been a debate between the thesis on temporary inflation and the thesis which says that inflation will stay, that people will want to make up for what they have lost in purchasing power.

What I believe is that inflation around zero or 1% everywhere is over, it's history.

Thank God !

We will return to inflation rates of around 2%, 3% What is temporary is the current overrun.

I think it will last again in 2022. Then, gradually things should calm down.

But it is not yet clear what the central banks or the governments will do.

"

Pursue the economic recovery

Inflation is therefore cyclical and not structural, like an overheating engine? And what about the monetary policy of the central banks, the ECB in particular, which wanted to reduce its support for the economy? This is surely not the time to withdraw, believes Daniela Ordoñez, chief economist France for Oxford Economics:

“Several times the ECB has said that we should not allow ourselves to be influenced by these temporary inflationary pressures which were external to the European Union. eurozone. But beware ! Decreasing the purchasing program does not mean stopping it right away. If we tighten monetary policy, we will kill demand, while we are out of the crisis. So, it is very important at this time to protect the activity and especially the confidence of households."

Maintaining the confidence of households and businesses is the

sine qua non

for the recovery to continue.

For this,

“strong and targeted”

measures would be needed

to reduce the addition of households with the lowest incomes, concludes Eric Delannoy.

Like this energy check of

100 euros paid to six million beneficiaries in France

.

Another avenue to explore: a temporary framework for electricity prices.

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