Dhe inflation in the euro area is still high – but is now being shaped by very different developments in the various euro countries. The inflation rate for the entire euro area was 5.5 percent in June, as the European statistical office Eurostat in Luxembourg announced on Friday after an initial estimate. In May, the rate was 6.1 percent, after 7 percent in April. In the past year, inflation rates were at times more than 10 percent.
Food has become significantly more expensive over the year, while energy prices have meanwhile become a dampening factor in the inflation rate. After a strong price increase in the past year, they have fallen again significantly. On the other hand, many things related to holidays have recently become more expensive, from hotel accommodation to package tours. On the other hand, some foodstuffs, such as vegetables, have fallen in price from month to month.
Depending on the euro country, the development is currently very different. This does not make the task of the European Central Bank (ECB) of ensuring a uniform monetary policy for the entire euro area any easier.
In Germany in particular, the inflation rate rose noticeably in June. According to the national method of calculating the consumer price index (CPI), it increased from 6.1 to 6.4 percent. According to the European calculation method of the Harmonized Index of Consumer Prices (HICP), which is used for comparisons with other euro countries, it even rose to 6.8 percent.
Particularly low inflation rate in Spain
In Spain, on the other hand, the rate fell in June and even fell below the ECB’s target of 2 percent. According to the European method of calculation, it fell from 2.9 to 1.6 percent.
In many other European countries, too, the trend was disinflationary, with inflation rates falling. In Italy it fell from 8 to 6.7 percent, in France from 6 to 5.3 percent and in the Netherlands from 6.8 to 6.4 percent. There are still particularly high inflation rates in the Baltic states of Estonia, Latvia and Lithuania, but they too have obviously passed their peak.
Three reasons for differences depending on the euro country
There are three reasons for the strong differences between the euro countries: The first reason, which explains the high rates in the Baltic countries, for example, is the differences in the situation and economic structure of the states. Countries closer to Russia and Ukraine struggle more with the aftermath of war. In addition, countries with less established economies often have higher fluctuations in the rates of change in gross domestic product and price levels.
The second reason is government intervention. In Germany, for example, a so-called statistical base effect plays a role in the increase in the inflation rate in June. Last year, the tank discount and the 9-euro ticket for the train had pushed down the corresponding prices and thus the inflation rate. Compared to the previous year, the price increases are currently higher.
The third reason is differences in how quickly changes in energy prices affect consumer prices. This is slightly different depending on the euro country. In Spain it is quite fast, in Germany it is rather slow. That’s why Spain has been particularly struggling when energy prices have risen. Now, however, the Spanish inflation rate is benefiting more than the German one from the fall in oil and gas prices.
“In Spain, energy costs for households have recently fallen sharply,” said Holger Schmieding, chief economist at Bankhaus Berenberg. In general, the energy prices for households in Spain fluctuate far more than in Germany, they are closer to the development of world market prices. Government interventions such as a price cap also played a role: “But the essential point is the greater proximity to the market.”
What does this mean for the monetary policy of the ECB?
The differences in the development of inflation should also challenge the ECB. ECB President Christine Lagarde has already announced that the central bank intends to raise interest rates again at the end of July, provided that developments do not go completely differently than expected. How things will continue in September has so far been left open. If inflation has already fallen significantly in some countries and instead there are fears that further interest rate hikes will have a greater impact on the economy and growth, this should prompt discussions in the Governing Council about the further line.
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