Since mid-2021, inflation in the euro area has increased at a pace last seen in the 1970s and early 1980s, after having been below the European Central Bank’s (ECB) 2% target for almost a decade.
Rising inflation has mainly been driven by surging energy prices (electricity, gas and other fuels) since the start of 2021. Inflation is expected to decline from an average of 8.4% in 2022 to 6.3% in 2023. It should finally decrease to 2% by the second half of 2025.
Headline inflation based on the Harmonised Index of Consumer Prices uses spending patterns of the average consumer and is not useful in investigating how inflation is affecting distinct groups of the population differently.
Higher inflation usually weighs heavier on the poorest, who lack savings to smooth their consumption over time. In addition, the savings they do have are often held in cash or in very low interest rate bank accounts that are not shielded from inflation, while richer segments of the population often hold stocks or inflation-linked bonds.
Think tank Bruegel uses instead the Household Budget Surveys to compute the inflation rates faced by individuals with different characteristics. It finds that the inflation rates faced by low-income individuals were 1.4, 1.7 and 0.3 percentage points higher than those faced by high-income individuals in Belgium, Italy and France, respectively.
Price levels affected each country in a different way. As of December 2022, the highest rate of inflation was registered in the three Baltic countries, with Latvia recording an annual growth of 20.7%. Inflation rose faster in the Baltics due to several differences compared with the rest of Europe, including the greater use of spot energy prices. In other markets, firms tend to rely on longer-term and fixed energy contracts.
At the end of last year, high rates of inflation were also recorded in Slovakia (15%) and Italy (12.3%).
By contrast, in the same period Spain recorded the lowest figure (5.5%) in the eurozone. The country introduced fuel subsidies and benefited from its historically low dependence on Russian gas.
Aside from inflation inequality, the rise in price levels has also sparked a debate among economists about the best way to tackle inflation. In particular, some have argued that strategic price controls on essential goods should be considered.
the rise in price levels has also sparked a debate among economists about the best way to tackle inflation
Economist Isabella Weber compared the situation today with the situation after the second world war. “Then and now, large corporations with market power have used supply problems as an opportunity to increase prices and scoop windfall profits,” she wrote.
Price controls might be useful in markets in which companies might be able not only to pass on increasing costs from supply chain difficulties, but also increase their profit margins, therefore leading to higher prices.
The idea is that targeted price controls could spare economies from the growth-depressing interest rate hikes. Others believe price controls can lead to a misallocation of resources that could create new shortages and supply bottlenecks, ultimately interfering with the open market.
