Business cycle The sharp rise in the price of electricity and petrol is plaguing Finland and the eurozone – the graphs show how fast many products have become more expensive recently

Consumer prices The rise in prices in Finland and the rest of the euro area has accelerated considerably since the autumn. It puts a particular strain on low-income households, much of whose income goes to consumption.

The luck of the accident is that, at least so far, the rise in consumer prices has not been very widespread but is mainly due to energy. It still indirectly affects the prices of many other commodities.

As the costs of companies that produce and sell goods and services increase due to higher energy prices, they will have to raise their consumer prices over time to maintain their profitability.

Inflation that is, the rise in consumer prices is examined by the consumer price index. It includes changes in the prices of hundreds of commodities. The consumer price index therefore specifically measures the change in consumer prices and not the price level.

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The change is compared on a monthly basis until the corresponding month of the previous year, when the inflation rate is found out.

This can be illustrated by a simplified example.

If the consumer price of a product rises from € 10 to € 11 within a year, its inflation will be ten percent. If the price remains at 11 euros for the next year, inflation will have stopped.

If, on the other hand, the price rises from 11 euros to 12.1 euros over the next year, the inflation rate will still be ten percent. Ten percent of the 11 euros is 1.1 euros.

In Finland inflation is slower than in many euro area countries.

According to preliminary data from Eurostat, the inflation rate in Finland in December was 3.2 per cent. In the eurozone, it was an average of 5.0 percent.

Central to the interpretation of inflation is the extent to which consumer prices change. Energy and food prices are subject to rapid and temporary changes. That is why economists are watching core inflation, which has been deprived of energy and food.

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Core inflation in the euro area was 2.6 per cent in December. In the graphs in this article, the latest information on the components of inflation is from November, because only preliminary data are available for December.

In the euro area consumer price index, the weight of energy is relatively small: 9.5%. However, the exceptionally strong rise in energy prices is the main reason for the rise in inflation: in December, energy prices in the euro area rose by 26% compared with December of the previous year.

Services play a major role in raising consumer prices. Their weight in the consumer price index is 42 percent, and they rose 2.4 percent.

The second most important are industrial products, which account for 27% of the weight in the index. In December, the inflation rate on industrial products was 2.9 per cent.

Consumer prices the rise in price usually returns to two basic aspects of the economy: demand and supply. If demand exceeds supply, prices will rise.

The increase in demand is usually due to the economic recovery. In the worst phase of the coronavirus pandemic, consumer savings increased as consumption opportunities declined due to restrictions on movement and business activity.

When restrictions were lifted a good year ago on the eve of summer, people could afford to spend more because of the savings.

Supply problems are mainly due to the closure or restriction of factories due to the coronary virus pandemic in order to control infections. Due to high uncertainty, companies also postponed their investments to increase production capacity.

As demand increased exponentially after the lifting of restrictions, supply was unable to meet demand. Many consumer products, raw materials and components became in short supply, which is likely to push up their prices.

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Energy all need: either as food or fuel.

Many households have noticed higher prices for electricity and fuels. This is mainly due to higher prices of crude oil and natural gas, as well as relatively low production of wind and hydropower due to exceptional weather conditions.

In the euro area, the rise in natural gas prices is also due to political tensions, as Russia has not increased its natural gas sales. The share of natural gas in Finland’s energy consumption is relatively small.

Based on financial market futures, energy prices are expected to come to a slow halt in the near future, thus slowing inflation. Over a longer period of time, the market estimates that energy will even become cheaper as supply problems ease.

Germany is the largest economy in the euro area, which also has a significant impact on the euro area consumer price index.

When goods and services become more expensive in Germany, it will boost inflation in the euro area as a whole.

“Inflation in Germany has accelerated in certain individual commodity groups, highlighting the effects of the opening up of tourism, rising energy prices, and increased demand and production bottlenecks during the pandemic. In principle, these factors have a non-recurring effect on the price level, ”says the advisor Lauri Vilmi From the Monetary Policy and Research Department of the Bank of Finland.

In Germany, VAT cuts to curb the financial damage of the coronary virus pandemic began to slow inflation in the summer of 2020.

The easing ended at the turn of 2020–2021, as a result of which consumer prices began to rise gradually. The effect is likely to disappear at the beginning of this year, as the change in prices is calculated from the corresponding period of the previous year.

Of the individual consignments in Germany, meat has become more expensive. Does this mean that you no longer eat sausage in Germany as passionately as you used to?

“In general, there are quite strong fluctuations in the price of food due to random factors. For example, the rise in meat prices in Germany has been affected not only by the abolition of the VAT reduction but also by the fact that chicken meat has become more expensive due to the bird flu that has limited supply, ”says Vilmi.

He also stresses that as a result of economic opening, demand for restaurants has recovered.

Economy forecasting is very difficult and it is almost impossible to predict inflation reliably. If inflation expectations rise, they will usually materialize.

For the time being, medium-term inflation expectations in the euro area are around 2%, where they should be according to the European Central Bank’s price stability target.

Like the markets, several research institutes and commercial banks estimate that inflation in the euro area will slow down this year.

On the other hand, a worsening coronavirus pandemic could, in the worst case, have unpredictable effects on both supply and demand.

The European Central Bank has signaled that, due to temporary factors, inflation may be faster than its 2% price stability target this year in order to reach the target in the medium term.

The problem in the euro area for years was that inflation was well below 2% – and at times even negative.

In the United States, the situation is different. There, the economy has recovered more strongly than in the euro area, inflation has already accelerated to 7% and there is a risk that it will catch up widely on wages.

Equally, it is likely that the era of exceptionally low inflation in the euro area is over. At least temporarily.