The rise in food and energy prices is driving up consumer prices in the eurozone. According to Eurostat, energy costs rose 39.2% in June, while food prices rose 7.5%. The trend is being exacerbated by countries scrambling to reduce their dependence on Russian gas.
Eurostat: Consumer prices were up 6.8% from a year earlier in June
Consumer prices rose at a faster pace in June than in July, according to Eurostat. The official statistics agency for the EU calculated the Grand Duchy’s inflation rate at 8.6% in August, slightly higher than Statec’s 8.5%. But overall, inflation remains lower than in the previous three months.
The increase was largely due to higher prices for energy and food. Gas prices rose by nearly 40.9% in June and jumped by 8.9% in food and alcohol. The Russian invasion in Ukraine had a significant impact on the global energy market, which has contributed to the increase in gas prices.
Food and non-alcoholic beverages, meat, non-alcoholic beverages, UHT semi-skimmed milk, and other food items accounted for the largest percentage increases. Meanwhile, prices for vegetables and potatoes fell by 2.2% and 13.6%, respectively. Meanwhile, alcoholic drinks, tobacco, and spirits, as well as motor vehicles, lowered year-on-year increases.
The latest reading comes after the ECB’s interest rate hike. After two years of stagnant inflation, it’s likely that European economies will experience a slowdown in the near future. However, the European economy’s fragile recovery is still in doubt. The recent spike in energy costs has left the Baltics and Eastern Europe particularly vulnerable.
PCE-deflator was up 4.8% from a year earlier and 0.6% from the previous month
The core PCE price index, which strips out volatile food and energy prices, was up 0.1% in July. While this is not as impressive as the headline figure, the underlying trend is still encouraging. Core PCE was up 4.8% year-on-year and 0.6% month-on-month in July, which is slightly below the corresponding figures for June. The slower-than-expected growth is unlikely to deter the Federal Reserve from raising interest rates.
The Euro Area’s consumer price index beat expectations in August, rising 0.5% q/q. Energy prices were the largest contributor to the overall increase, rising 38.3% from a year ago, but remained unchanged from a month ago. While energy prices remain relatively stable, they are still contributing significantly to inflation. Despite the recent fall in European natural gas prices, Russia’s actions are likely to push gas prices higher in the coming months.
Consumer spending fell in December, but it was still relatively strong when compared to December 2012. Despite the government shutdown and stock market tumble, the PCE deflator rose by 0.1%, which is more than enough to maintain economic growth in 2019. With wage growth on the rise, consumer spending should remain solid in the coming months.
Unemployment rate in the euro area is higher
The CES is a component of the ECB’s Economic Bulletin that measures changes in employment, job searching, earnings expectations, and job satisfaction. It is a more comprehensive and timely source of data on the main labour market aggregates in the euro area. The CES also provides insight into the progress of the labour market recovery in the region.
While the unemployment rate in Europe has fallen below pre-pandemic levels, economists say higher inflation has weakened workers’ purchasing power, making wage increases unlikely. The unemployment rate in the euro area stood at 7.3% in October and is expected to reach 8.6% in September 2020. However, economists credit small swings in the data to the implementation of furlough programs that have paid businesses to keep idle workers.
The ECB’s decision to raise policy rates in July is in response to rising inflation in the euro area. Core inflation in the eurozone has reached 3.8 percent.
Real estate slump
Inflation in the eurozone continued to climb in March, reaching a record high. Rising energy prices are one of the main reasons for the increase. In Germany, energy prices rose by 38.4% in March, while food prices increased by 7.5%. Rising energy costs are making it difficult for people in the EU to keep up with rising costs of goods and services. The European Central Bank has predicted that inflation will continue to rise across the eurozone until at least 2023.
The European Union’s economy is growing faster than previously estimated, with households spending expanding despite the squeeze on disposable income from spiraling inflation. The euro zone’s economy expanded by 0.8% quarter-on-quarter and 4.1% year-on-year in the first quarter of 2018, according to Eurostat. While Germany registered virtually no growth, the Netherlands and Italy saw robust expansions.
COVID-19 is still a major concern for European consumers, but it has been replaced by rising prices. Inflation has risen in most of the eurozone’s member countries, including France, Spain, Italy, and Germany. The rise in prices has hit the industrial base in these countries, and is potentially causing a prolonged downturn. Inflation in the eurozone is contributing to stagflation, a term that refers to high inflation coupled with weak economic growth.
Overinvestment
Despite the alleged decline in living standards in Europe, household spending remains relatively high in most countries. The largest areas of expenditure include housing, food and drink, leisure, culture, restaurants and hotels, and recreation. But spending on these categories is not uniform across the EU, with some countries spending more on these categories than others.
The reasons for this seem to be varied. Sometimes, the difference is large. But a large part of this difference can be explained by differences in prices. In any case, no two countries’ expenditure structures are identical, which may explain why there are large differences. Fortunately, it is possible to measure the change in household spendings over time using a statistical tool called sigma-convergence.
In the year 2020, household spendings in EU countries are projected to decline by 8%. Across the EU, this is the largest decline since this time series began. Social distancing measures, government restrictions on movement, and the growth of non-essential economic activities all impacted household spendings. Malta saw the largest drop in household spending, followed by Spain, Croatia, and Greece. Denmark, Lithuania, Poland, and Slovakia registered the smallest decreases in household spending.
Pandemic-related shutdowns
Pandemic-related shutdowns have a negative impact on many European countries. They have affected the economy and the labour market of many European citizens. Many industries and public services have ceased operations. This has increased economic stress for households. Many are now relying on public and private transfers and assistance from employers.
Some countries have taken drastic measures to stop the spread of the virus. In Europe, the Netherlands, which saw the largest increase in cases, has enacted a partial lockdown, restricting travel, school, and sports. In Austria, the government is expected to discuss measures to protect unvaccinated citizens from the virus.
In response to the crisis, the European Commission has issued guidelines for national authorities to deal with the situation. One of those directives includes ensuring access to asylum in the face of border closures. However, some member states have de facto suspended or limited asylum procedures. Meanwhile, Italy, Spain, and Portugal have taken steps to ensure that public health care is protected during the pandemic. This should be a source of concern for all EU members.
Rising oil prices are causing cost-push inflation
Oil prices have historically correlated with inflation, but the relationship has become less tight since the 1970s. This is likely due to the growth of the service sector, which uses less energy. However, oil is still an important input in manufacturing and shipping. Consequently, higher oil prices increase the cost of many goods. This trend could increase inflation expectations.
Rising oil prices are also affecting consumer confidence. Oil prices have increased 15 percent in January, the highest in seven years. Fears of a Russian invasion of Ukraine drove up oil prices. As a result, the price of gasoline rose to about $3.40 a gallon, and the average price of gasoline is close to $3.40.
The price of gasoline is only the latest example of how rising oil prices are impacting the U.S. economy. Energy costs are a huge contributor to the nation’s inflation. Rising oil prices are affecting the cost of fuel, food, and other goods. The Russian invasion of Ukraine is adding to the problem by making energy costs even higher. The cost of energy is 7.5% of the U.S. consumer price index, meaning that rising oil prices are forcing businesses to raise prices.
Companies with a monopoly position in the market can also create cost-push inflation. These companies can increase prices to meet their profit goals. For example, OPEC was formed to have monopoly control over oil prices. Before it was formed, OPEC members competed on price. They produced around 37% of oil each year and controlled 80% of the world’s proven reserves. This led to cost-push inflation, which led to lower output and real GDP.
