Last month, everything in the eurozone became on average 2 percent more expensive, according to the latest preliminary figures from the European statistical office Eurostat. With this, the European Central Bank has achieved its most important goal: to ensure that the value of a euro decreases on average by almost 2 percent per year.
In fact, with an expected inflation rate of 2 percent in May, the bank has missed the target slightly. That is not a bad thing for the time being, after more than two years of too little inflation, few economists are awake from temporarily a bit too much. It does lead to discussion: is it just a little bit, and is it temporary?
A sensitive balance
The idea is well known: a euro that is constantly depreciating a little bit is good for the European economy. For example, it ensures that people spend their money and do not hoard it, which would happen if it becomes worth more on its own. In addition, debts are shrinking.
Achieving that price stability is not easy. How much you can buy with a euro is the sum of, for example, the supply and demand of products and services, and how many euros are in circulation. That balance has been shaken violently in recent times.
For example, the pandemic has caused factories to close and supply chains to shut down. Central banks brought extra money into the economy, with which governments could keep companies afloat and ensure that people keep their jobs and incomes.
As a result, demand for products and services picked up faster than expected, while factories and service providers were unable to keep up immediately. In addition, energy prices have recovered from last year’s oil crisis. Energy is an important cost item that weighs heavily in the calculation of how much you can buy with a euro.
Ascending numbers
All in all, there is a lot of money in circulation, while there is scarcity, which causes higher prices and therefore inflation. This is reflected in recent figures.
In the US, prices rose on average by 4.2 percent in April compared to the previous year. In Spain and Germany inflation stood at 2.4 percent in May. In the Netherlands, it remained at 1.9 percent in the past two months.
Temporary or not
The jump from 1.6 percent inflation in April to 2 percent in May in the eurozone is largely due to the rise in energy prices. That effect will diminish in the coming months, expects Bert Colijn, eurozone economist at ING. “But that doesn’t mean higher inflation is over.”
He points to the price of goods, which are scarce and will remain scarce because production and supply are still stalling. The chip shortage, for example, still limits the influx of, for example, cars, telephones and dishwashers.
At the moment, sellers have barely raised their prices, says Colijn. But since they themselves are also encountering higher costs and the demand is high, he expects that this will come. The first price hike in May is likely the start of a longer ride that could last for months.
Mateusz Urban, economist at Oxford Economics, also sees scarcity pushing up prices in the near future. Because despite the fact that production in Italian and Spanish factories is gaining momentum, it is still faltering in Europe’s largest economy, for example: Germany.
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